By Ben Cohen: The news that Facebook shareholders are suing the social network, CEO Mark Zuckerberg, and a number of banks that collaborated with Facebook’s IPO last week should not come as a surprise to anyone familiar with the murky dealings of Wall St.
The shareholders are alleging that crucial information was concealed ahead of the offering and that the defendants did not disclose “a severe and pronounced reduction” in forecasts for revenue growth due to users increased access of the social network through mobile devices. Facebook shares fell 18.4 percent from their $38 IPO price in their first three trading days, causing a panic amongst investors who had subscribed to the incredibly high initial valuation (Facebook was given a price tag of US$104 billion based on only $1 billion profit in 2011). According to Reuters:
The lawsuit said the underwriters disclosed the lowered forecasts to “preferred” investors only, instead of all investors.
“The main underwriters in the middle of the road show reduced their estimates and didn’t tell everyone,” said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit on Wednesday. “I don’t think any investor in Facebook wouldn’t have wanted to know that information.”
This is another example of banks colluding to distort the market at the expense of everyone else to serve their own interests – a highly dangerous practice given their enormous power over the market. Writes Matt Taibbi:
All of these stories suggest that Wall Street is increasingly turning into a giant favor-and-front-running factory, where the big banks and broker-dealers that channel vast streams of crucial non-public information (about the markets generally and their clients specifically) are also trading for their own accounts, and sharing information with a select group of “preferred investors,” who in turn help the TBTF banks move markets in this or that desired direction by jumping on or off various pigpiles at the right times.
Sooner or later, people are going to clue into the fact that one or two big banks, acting in concert with a choice assortment of unscrupulous “preferred investors,” can at least temporarily prop up or topple just about anything they want, from Greece to Bear Stearns to Lehman Brothers. And if you can move markets and bet on them at the same time, it’s impossible to not make tons of money, which incidentally is made at everyone else’s expense. So we should always be on the lookout for any evidence that that sort of coordinated, non-disclosed activity is taking place.
This coordinated, non-disclosed activity is exactly what brought the economy down in 2008 – insiders knew exactly how inflated the property market was (because they were of course the ones inflating it) yet went to extraordinary lengths to hide this information from their clients. Not only that, they were hedging against their own investments to ensure they couldn’t lose, knowing full well the tax payer would step in and supply them with cash if it all went belly up.Wall St has a very clear history of this type of behavior, and if it isn’t carefully monitored, we could experience another giant bubble that could have been avoided if vital information had been made public.
Anyhow, check out this discussion with my two good friends Alyona Minkovski and Lauren Lyster on Alyona’s show as they do a much better job than me of explaining exactly what occurred during the Facebook IPO and why it is so dangerous: