If sour grapes were traded on the Nasdaq Stock Exchange, we could all be driving Lamborghinis and drinking sweet wine.
Once the Facebook Frenzy, call it today the Facebook Folly.
A week ago it was all across the news: Facebook stock was going public. Quick wealth was nearly guaranteed. Investors would be nuts not to take a flutter.
And now the lawsuits have begun rolling in.
The Senate Banking Committee has begun an investigation.
Facebook might leave Nasdaq.
Sour grapes reign.
According to The Associated Press, regulators are examining whether Morgan Stanley, the lead underwriter of the initial public offering, selectively informed clients of an analyst’s negative view of Facebook’s prospects.
Meanwhile, a group of shareholders filed suit against Facebook, its executives and Morgan Stanley. The suit, filed in U.S. District Court in New York, claims the IPO documents contained untrue statements and omitted important facts, such as a “severe reduction in revenue growth” that the company was experiencing at the time of the offering. The three plaintiffs, who bought the stock on the first day of trading last Friday, claimed they were damaged.
Not everyone fell to the fever.
“I would tell people not to invest in an IPO on the first day. That’s what I told a number of clients,” said Dorothy Lewis, a Certified Financial Planner and founder and CEO of the Tacoma firm Financial Insights.
“None of my clients bought it. I had to talk to some and tell them not to buy it, but now they thank me,” she said Wednesday.
Lewis speculated before the stock began trading that there would be missteps.
“Because of the demand, I told clients they would not even know what it was trading for,” she said.
Indeed, the trading systems at the Nasdaq exchange broke down early, and the stock did trade “blind” for more than two hours, Lewis said.
“It’s not something we gave much thought to,” said Gary Brooks, also a Certified Financial Planner and a principal at Tacoma’s Brooks, Hughes & Jones.
Brooks said Wednesday that he did understand the hullabaloo over the initial offering.
“It was more of a euphoria bet,” he said. “People hope to make a quick profit selling to the people who come behind them. There’s a behavioral aspect that people like to find winners and congratulate themselves for having done so.”
That’s where a trained professional comes in.
“Even with a company like Facebook, with that much attention behind it – the legitimacy of the business model is unproven,” Brooks said.
The reaction from investors has come nationwide.
Judson Gee, a financial adviser in Charlotte, N.C., placed a call Wednesday morning to a client who plowed $50,000 into Facebook on Friday.
Gee said he called to tell the client, a restaurateur, about reports that Morgan Stanley had told only select customers about an analyst’s reduction of company revenue estimates before the IPO broke open.
“I could see his jaw dropping on the other side,” Gee said. “A lot of expletives came out.” He said his client had asked: “How can they give that information to the big boys and not give it to the public?”
Despite the latest lawsuits, Facebook’s stock climbed $1, or 3.2 percent, to close at $32 on Wednesday, still down from its opening price of $38.
However, there now are hints that Facebook may simply cut ties with Nasdaq. A person familiar with the matter, speaking on condition of anonymity because the person was not authorized to speak publicly, told The Associated Press that Facebook was in talks with the New York Stock Exchange to move its stock listing there from Nasdaq.
According to the Los Angeles Times, there may be some truth in the claims made in the suit.
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.
In the end, however, risk does accompany investments – and that includes investment in initial public offerings.
The results can swing either way.
Over the past six months, Ubiquiti Networks Inc., which had its IPO last October, is up 129 percent.
Dunkin’ Brands Group Inc., which debuted in July, is up 69.47 percent.
But Lone Pine Resources, an independent oil and gas exploration, development, and production company with a year on the market, is down 72.38 percent in the past six months.
Groupon, Inc., which came in with its own hubbub last November, is down 38.05 percent.
Still, opportunities beckon. If you hurry, you might have time to put in an order for stock in Corsair Components Inc. and Tria Beauty Inc.
Their IPOs issue firstname.lastname@example.org
The Associated Press contributed to this report.