The Facebook IPO scandal

To A We

And speaking of Facebook’s deplorable business model, there turns out to be some Wall Street shenanigans going on as the IPO began. Lest you forget, Wall Street plays by its own rules, and if you want to play too, you are the mark, the rube. The amount of hype for the Facebook stock was, and remains overwhelming. That alone should make one suspicious. I know I was¹

The Los Angeles Times reports:

As Facebook shares continued their slide, regulators launched inquiries into whether privileged Wall Street insiders were alerted to the company’s weakening financial projections, leading them to shun the stock or dump shares just as buying was opened to the public.

Morgan Stanley, which led the Wall Street effort to bring the social network public, came under fire following reports that the bank had told some favored clients that the bank was cutting its revenue estimates for Facebook. The lowered expectations came after the tech giant expressed caution in a public filing about its advertising sales on mobile devices.

The legal issue raised could be “securities fraud — plain and simple,” said Ernest Badway, a securities lawyer in New York and New Jersey and a former enforcement attorney at the U.S. Securities and Exchange Commission. “You can’t be putting out two sets of numbers.”

SEC Chairwoman Mary Schapiro said the agency will examine “issues” into the bungled Facebook public offering. The Financial Industry Regulatory Authority, the Wall Street industry-funded watchdog, has also expressed concern, and Massachusetts securities regulators have issued subpoenas for Morgan Stanley.

“If true, the allegations are a matter of regulatory concern to FINRA and the SEC,” Rick Ketchum, the watchdog’s chairman and chief executive, said in an e-mailed statement.

One major institutional investor was informed of the lowered expectations during Facebook’s IPO “roadshow,” in which Morgan Stanley and other underwriters appeared before mutual funds and other big investors to make the case to buy shares in advance of the public offering.

“I am pretty sure the grandma who bought 10 shares of Facebook through her Schwab account didn’t get that memo,” said a person familiar with the matter who declined to be named to preserve his business relationship with Wall Street investment banks.

Facebook’s offering was one of the most hyped events on Wall Street, and became the biggest tech IPO in history. The company raised $16 billion by listing on the Nasdaq Stock Market in a move that valued the company at $104 billion, which is bigger than American corporate stalwarts such asMcDonald’s Corp. andAmazon.com Inc.

(click here to continue reading Facebook IPO flop drawing increased scrutiny – latimes.com.)

I found this phrase telling:

Some bankers were also troubled by the huge demand from individual investors, a relatively capricious group. While Facebook allocated most of its shares to big, institutional investors like mutual funds and hedge funds, it also gave a larger-than-usual block, close to 25 percent, to ordinary investors.

Around the same time, red flags emerged about the company’s growth prospects. On May 9, Facebook revealed in a regulatory filing some potential challenges to its growth. In particular, the company highlighted that users were increasingly using Facebook on mobile devices, but the company was not making much money on mobile ads.

(click here to continue reading Facebook I.P.O. Raises Regulatory Concerns – NYTimes.com.)

Banks don’t want the hoi polloi  to clutter up their hallways, mess up their nice tile floors.

Stay As You Are

Gawker’s Adrian Chen:

Facebook’s stock continues to suck harder than a Northwestern University freshman on a 5-foot bong in his profile pic. And the fallout from the most hyped IPO in history bursts not just the illusion that Facebook is actually worth $100 billion, but the idea that Facebook is different than any other corporation hell-bent on making as much money as possible for a handful of very wealthy people.
The lead-up to last Friday’s Facebook IPO was an orgy of web 2.0 populism. Started by a Harvard undergrad in his dorm room, Facebook was poised to become the largest tech IPO ever. And its value stemmed from our stuff—our status updates, pictures and pokes! This was the major driver of the outlandish hype surrounding Facebook’s IPO; the sense that the public would finally get a chance to share in the spectacular success of the company we helped build.

…(Incidentally, now that Facebook’s tanking, Morgan Stanley and the other banks that underwrote the deal have a good shot at making a profit by short selling millions of Facebook shares that had been created just for them under an arcane financial move known as the “Greenshoe option.” Nice deal, if you can get it.)

These maneuvers show once again that Facebook’s lofty ideals are at odds with how it functions in reality. For a company built on sharing and transparency, Facebook’s IPO was uniquely private and opaque. For a company which Mark Zuckerberg boasted in a letter to investors “was not originally created to be a company. It was built to accomplish a social mission,” Facebook sure as hell acted like a company in helping to enrich insiders at the expense of public investors.

So, Mark Zuckerberg screwed Facebook investors in the IPO like he’s screwed Facebook users on privacy. (Hours before the IPO, Facebook was hit with a $15 billion lawsuit over privacy violations.) This would be just a hilarious coincidence, except for the vast amounts of money he’s made doing both.

(click here to continue reading The Facebook IPO Was an Inside Joke.)

Every Ace Got Played

Felix Salmon writes:

This whole episode stinks. It’s almost certainly not illegal. But if you look at the Finra rules about such things, it definitely violates the spirit of the law. For instance, the rules say that Morgan Stanley analysts weren’t allowed to show Facebook their research before it was published — but they don’t say that Facebook can’t quietly whisper in Morgan Stanley’s ear that its estimates might be a bit aggressive. Obviously, there’s no need for the analysts to give Facebook advance notice of their earnings downgrade if that earnings downgrade was a direct consequence of something Facebook told them.

Similarly, Morgan Stanley isn’t allowed to publish a research report or earnings estimates for Facebook within the 40 days following the IPO. But a few days before the IPO? I guess that’s OK — even if the way the estimates were “published” meant they were only available to good friends of the bank.

More generally, the rules ignore the key point here. Retail investors, and the market as a whole, knew when Facebook had its IPO that Morgan Stanley (and JP Morgan, and Goldman Sachs) had research teams with estimates for Facebook’s future earnings. They also knew that those estimates would be made public in 40 days’ time. And if they were sophisticated enough, they probably knew that select Morgan Stanley clients were given access to the analysts and their estimates.

What they didn’t know — what they couldn’t know, because nobody told them — was that those estimates had been cut, significantly, just days before the IPO.

(click here to continue reading The Facebook earnings-forecast scandal | Felix Salmon.)

Selling Her Spare Favors

John Cassidy of The New Yorker points out there have been trades of Facebook for years now, just not public trades. In other words, the big investors already cashed out…

The fact is, Facebook’s I.P.O. wasn’t really an “initial” stock offering. In December, 2010, Goldman Sachs raised $500 million for the company in a deal that, following objections from the Securities and Exchange Commission, was limited to overseas investors. In the I.P.O. world, these late-stage quasi-public offerings are called “D-rounds,” and they are becoming increasingly common. Zynga did one before its I.P.O., and so did Groupon. They provide a cashing-out opportunity for insiders who would rather not wait until the I.P.O. More to the point, they allow “hot” companies to bid up the price of their stocks well before the investing public gets a sniff.

Groupon’s D-round, which raised $950 million in January, 2011, valued the company at close to $5 billion. (It is now valued at $8 billion.) The Goldman offering for Facebook valued the company at $50 billion. (It is now valued at about $95 billion.) The valuations put on the companies in these deals were quickly reflected in the so-called “gray market,” where investors in the know could buy and sell the firms’ stocks well before they started trading on the open markets. Now that Facebook’s stock is trading publicly, many of the early players have already sold out, taking a handsome profit.

How will the public investors fare? So far, they aren’t doing well, but it is still early. I said the other day that Facebook isn’t necessarily a bubble stock, but it is undoubtedly a very expensive one. Buyers are bearing a lot of risk, and it is hard to see them ever reaping the sort of returns that investors in companies like Amazon and Google enjoyed. At twenty-five times trailing revenues and a hundred times trailing earnings, the $38 I.P.O. is already discounting an awful lot of expansion—and this at a time when Facebook’s growth rate has already slowed.

(click here to continue reading Inside Job: Facebook I.P.O. Shows the System Is Broken : The New Yorker.)

And over and over we read the phrase, “unsuccessful IPO”, and yet what does that mean? The bankers got theirs, the Facebook execs got theirs…

may have doomed any real chance the social-networking company had that its stock would jump on its first day of trading—a hallmark of successful IPOs. On Tuesday, the second full day of trading, Facebook shares fell $3.03, or 8.9%, to $31, after falling 11% on Monday. Investors are blaming the downdraft on the last-moment expansion of the offering.

Securities and Exchange Commission Chairman Mary Schapiro said Tuesday that her agency will examine “issues” surrounding the IPO in an effort to ensure confidence in public markets. An SEC spokesman declined to elaborate.

(click here to continue reading Inside Fumbled Facebook Offering – WSJ.com.)

Immigration Rally: May Day, 2006 – The Flag Guy

Some paid for the money with coin that I wouldn’t be happy paying with, namely being banned from the US. Is the money really worth it? I’d say no, but I like living in America.

Facebook co-founder Eduardo Saverin’s decision to renounce his U.S. citizenship just in time to avoid a large tax payment essentially means he will not be able to re-enter the United States again, immigration experts tell TPM.

“There’s a specific provision of immigration law that says that a former citizen who officially renounces citizenship, and is determined to have renounced it for the purpose of avoiding taxation, is excludable,” said Crystal Williams, executive director of the American Immigration Lawyers Association. “So he would not be able to return to the United States if he’s found to have renounced for tax purposes.”

…

Two immigration lawyers said his explanation hardly passes the laugh test. Saverin’s move was timed to the initial public offering of shares of Facebook stock. The valuation of the Facebook IPO explodes Saverin’s stake in the social media company to some $3 billion, on which avoiding taxes could save him at least tens — if not hundreds — of millions of dollars. Nor does it help his case that he relocated to Singapore, which levies no taxes on those earnings.

Two senators mobilized Thursday to crack down on Saverin and other tax dodgers.

“He’s fucked,” said Adam Green, an immigration lawyer based in Los Angeles. “He must have gotten horrendous advice.”

(click here to continue reading Renouncing Citizenship Makes Facebook Co-Founder Inadmissable To US | TPMDC.)

Footnotes:

1. I tweeted thus on May 17

   “Facebook Prices Its IPO at $38” on.wsj.com/KUy4pQ I’m no market expert, but that seems WAY over-priced. I’d short it if I could

   — Seth Anderson (@swanksalot) May 17, 2012

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