Commentary

Facebook and NASDAQ Sued; SEC May Investigate

What is it with bankers screwing the pooch nowadays? Facebook’s long-awaited initial public offering is rapidly heading south, and not just in the value of the stock, which was trading at $31.85, down 16% from its IPO price of $38, at the time of writing. Now Facebook and its underwriters, led by Morgan Stanley, are being sued by investors and may also be in trouble with regulators from the Securities and Exchange Commission and Financial Industry Regulatory Authority.

During their “road shows” promoting the stock to potential investors in the final days before the IPO, Morgan Stanley, JPMorgan Chase and Goldman Sachs shared new forecasts for Facebook which revised second quarter revenues downwards by about 5%, according to some sources. These forecasts, based on last-minute calculations by Morgan Stanley analysts, were allegedly only shared with big institutional and private investors -- meaning the information didn’t get out to the ordinary “retail” investors who were lining up for the IPO.

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What’s more, Morgan Stanley and the other underwriters decided to go ahead with the IPO at a price of $38, rather than revising the price down in step with their revenue forecasts. Morgan Stanley’s favored clients may thus have had an advantage over ordinary investors heading into the IPO, making them more likely (for example) to sell their stock after a small gain rather than hold on for a big “pop.” Likewise, when the stock price sputtered, they would be more likely to cash out near the original price or even sell at a loss, knowing there was a greater downside risk attached to the stock.

Although it’s too soon to say if any regulatory infractions or crimes were committed, the situation is suspicious, to say the least. As many of the buyers in these last-named scenarios were likely to be retail investors, the whole thing starts to look like an organized fleecing of ordinary investors by big Wall Street types. Even if it wasn’t deliberate (and it’s hard to imagine such a glaring oversight) the underwriters are still open to charges of simple negligence.

Thus the SEC and FINRA are saying they will “review” the Facebook IPO with an eye to finding evidence of likely negligence or wrongdoing, which could trigger more in-depth investigations leading to regulatory sanctions or worse. Meanwhile Facebook, Morgan Stanley, J.P. Morgan, Goldman Sachs, and others are also being sued by three investors -- Brian Roffe Profit Sharing Plan, Jacob Salzmann, and Dennis Palkon -- represented by Robbins Geller, which won $7 billion from Enron. According to the lawsuit filed in the U.S. District Court in Manhattan, “Plaintiffs and the Class have suffered losses of more than $2.5 billion since the IPO.”

Separately, NASDAQ is being sued by Phillip Goldberg, Facebook investor who accuses the exchange of failing to handle transactions in a timely fashion on the day of the IPO, leading to losses for himself and numerous other investors. Goldberg is seeking a class action lawsuit, meaning NASDAQ could be liable for a huge settlement if other investors can show their trades were bungled, as seems likely.

Whatever the outcome of these investigations and lawsuits, one thing is for sure: by opening themselves to charges of incompetence and possibly wrongdoing just days after what was supposed to be a major milestone for the company, Facebook, the bankers and NASDAQ screwed that pooch, big time.

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