Wall Street Bankers Secretly Scammed Facebook IPO Buyers


Alexander Higgins
May 23, 2012

Wall Street Banks scammed the public when they shared secret earnings estimates and valuations of Facebook with insiders much worse than they publicly reported.

FACEBOOK - MUPPET BAIT FOR THE MASSES

FACEBOOK – MUPPET BAIT FOR THE MASSES

Facebook continues along its epic drop from its opening trading price of $42.05 to a new low of $30.98 of today as the SEC and FINRA are likely to open an investigation to circumstances surrounding Facebook’s public stock offering.

The plummet comes as Reuters revealed that Wall Street Banks scammed the public when the secretly cut their revenue estimates for Facebook during the IPO roadshow and only let their most lucrative retail investors now about the cuts.

By withholding the information from the public,  millions of mom and pop retail investors were set up for a blood bath, and as quoted from the Yahoo! News article below, Facebook IPO buyers deserved to be “mad as hell” about it.

Facebook crashed a whopping 10% from its opening price last Friday and at the end of trading Monday closed down 20% from Friday’s opening price leaving millions of people burned for 20% losses by Wall Street’s scam.

Those losses will only continue as financial news outlets report that the offerings IPO valuation of over $100 billion is up to 10 times higher than the price Facebook is actually worth.

Further contributing to the downward trend are a slew of negative media reports now hitting the wires about Facebook’s prospects as Wall Street continues to take every avenue they can to bet against stock.

From Yahoo! Finance

Facebook Bankers Secretly Cut Facebook’s Revenue Estimates In Middle Of IPO Roadshow

And now comes some news about the Facebook (FB) IPO that buyers deserve to be outraged about.

Reuters Alistair Barr is reporting that Facebook’s lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow.

This by itself is highly unusual (I’ve never seen it during 20 years in and around the tech IPO business).

But, just as important, news of the estimate cut was passed on only to a handful of big investor clients, not everyone else who was considering an investment in Facebook.

This is a huge problem, for one big reason:

- Selective dissemination. Earnings forecasts are material information, especially when they are prepared by analysts who have had privileged access to company management. As lead underwriters on the IPO, these analysts would have had much better information about the company than anyone else. So the fact that these analysts suddenly all cut their earnings forecasts at the same time, during the roadshow, and then this information was not passed on to the broader public, is a huge problem.

Any investor considering an investment in Facebook would consider an estimate cut from the underwriters’ analysts “material information.”

What’s more, it’s likely that news of these estimate cuts dampened interest in the IPO among those who heard about them. (Reuters reported exactly this–that some institutions were “freaked out” by the estimate cuts, as anyone would have been.)

In other words, during the marketing of the Facebook IPO, investors who did not hear about these underwriter estimate cuts were placed at a meaningful and unfair information disadvantage. They did not know what a lot of other investors knew, and they suffered for it.

Selective dissemination of this sort could be a direct violation of securities laws. Irrespective of its legality, it is also grossly unfair. The SEC should investigate this immediately.

We first heard rumblings about this last week, and we were so startled that we assumed the reports were wrong. Then, over the weekend, when Reuters reported the basic story again, we said that if it was true, Facebook IPO buyers deserved to be “mad as hell” about it. And now Reuters has the details, and they sound as bad as we had feared.

There are a couple of possibilities for what happened.

The first one is bad news for Morgan Stanley and the other lead underwriters on the deal.

The second is also bad news for Facebook.

According to Reuters, the underwriter analysts cut their estimates after Facebook issued an amended IPO prospectus in which the company mentioned, vaguely, that recent trends in which users were growing faster than revenue had continued into the second quarter.

[...]Now, regardless of why the analysts cut their estimates (and this will be important), estimate cuts of any sort are material information, so if this news was given to some institutional clients, it also obviously should have been given to everyone.

That’s the first problem.

The second potential question and problem is whether Facebook told the underwriters to cut their estimates–either by directly telling them to, or, more likely, by “suggesting” that the analysts might want to revisit their estimates in light of the new disclosures in the prospectus.

If there was any communication at all between Facebook and its underwriters regarding the analysts’ estimates, Facebook will likely be on the hook for this, too.

Speaking as a former analyst, it seems highly unlikely to me that the vague language in the final IPO amendment would prompt all three underwriter analysts to immediately cut estimates without some sort of nod and wink from someone who knew how Facebook’s second quarter was progressing. (To get this message from the language, you really have to read between the lines). But even if this is what happened, it is still unfair that news of the estimate cut wasn’t disseminated quickly and clearly to everyone considering buying Facebook’s IPO.

[...]Source: Yahoo! Finance

On The SEC investigation:

Facebook shares drop again as SEC, FINRA call for review

(Reuters) – Facebook’s shares fell sharply again on Tuesday and two top U.S. financial regulators called for a review of the circumstances surrounding its troubled initial public offering last week.

The separate calls for review, by Securities and Exchange Commission Chairman Mary Schapiro and FINRA Chairman Rick Ketchum, added pressure on the company, its underwriters and the Nasdaq, all of which have taken blame for the stock’s harried opening and subsequent sharp decline.

[...]

With Facebook shares all but impossible to sell short, investors have sought out almost any related vehicle to bet against the social network. Over the past three trading days, prices plunged on two closed-end funds that owned pre-IPO shares. Firsthand Technology Value Fund and GSV Capital Corp both dropped more than 25 percent even though their Facebook holdings make up only a small fraction of assets.

“Until investors can actually short Facebook, they have to keep shorting other things that can give them some sort of proxy for Facebook,” said Thomas Vandeventer, manager of the Tocqueville Opportunity Fund, which owns shares of both the battered closed-end funds.

“There was a quick rush to exit yesterday, and when it broke the deal price it became self-fulfilling that there was going to (be) additional pressure,” said Michael James, a senior trader at regional investment bank Wedbush Morgan in Los Angeles.

Investors were still shaking their heads over the botched opening trading of Facebook when Reuters reported late Monday that the consumer Internet analyst at lead underwriter Morgan Stanley cut his revenue forecasts for Facebook in the days before the offering.

JPMorgan Chase and Goldman Sachs, which were also underwriters on the deal, each revised its estimates during the road show as well, according to sources familiar with the situation.

“The allegations, if true, are a matter of regulatory concern” to the Financial Industry Regulatory Authority and to the SEC, FINRA’s Ketchum told Reuters.

One mutual fund source said they had never, in a decade of experience, seen an underwriter cut a company’s outlook during the road show prior to an offering

Source:Reuters

In the mean time, Wall Street media outlets are running ever story they can to further push the price down.


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