Facebook Initial Offering Debacle Could Further Erode Economy

If it sounds like a scam and smells like a scam, it is probably a scam.

Zuckerberg and Thiel sold off millions of shares

By LUIS MIRANDA | THE REAL AGENDA | MAY 23, 2012

Investors don’t seem to have taken note of the dot-com bubble that bursted just a few years ago and decided to trust Facebook’s growing popularity to put their money on the blue tech giant. Despite the warnings issued by investment experts about unwarranted tech companies whose real value is not reflected by how many people are willing to give the NSA their personal information in exchange for trendiness, greedy small, mid-size and large investors decided to put up with another scam that was announced well ahead of its time.

Facebook’s initial public offering in itself was a very risky bet for people who dared to make a quick buck out of the company’s growing acceptance around the world. However, there are those who would jump from a tall building without a parachute if such an act comes wrapped around with the words cool, promising, trendy, nice, future and so on. After only three days of trading, Facebook stock dropped 18 percent; a number that could have been larger if its underwriters hadn’t intervened to keep the adventurous offering afloat.

Although the fictitious stock gained big time early in the trading, its value dropped like a hammer hitting levels inferior to the opening price of $38. For most mid and low level investors this is already a disaster, but the situation could get even worse for those who decide to keep cool until the price stabilizes to its actual value. Current analysis of the future of the stock suggests that the price is likely to plummet to as little as $10 per share. That is right. The public hype together with the massive cultural phenomenon that Facebook turned into since its creation does not determine the actual value of its stock. According to an analysis conducted by Thomson Reuters’ StarMine, the correct price should be around $9.59 per share. Most investors must be asking themselves where was this analysis a week ago?

According to Reuters, multiple price analysis suggest that earnings projections for the company will reach an amount that reflects the growth of the technology sector in general. Facebook’s future shows gains of about 10.8 percent, whereas the price at which its stock was offered shows an inflation in value of about 24 percent. Would the abrupt fall in value be a temporary occurrence perhaps? Not likely. Especially now that some of the procedures to offer, sell and trade Facebook’s stock are under questioning and the practices may go under careful review by authorities.

A number of issues popped out since Facebook began offering stock to investors; among them, Morgan Stanley’s cut in its revenue forecasts, Facebook’s stock sell off, the loss of 18 percent in its value, a lawsuit filed by an investor after he smelled a rat, reviews begun by financial regulators and so on. All in all, Facebook’s IPO operation turned one of the fastest transfers of money in the near past; about $40 billion. “Facebook right now is going for far more than what it’s worth, it’s like buying $1 for $1.98, it just doesn’t make sense at this price,” said Eddy Elfenbein, editor at Crossing Wall Street. “Just from basic modeling the stock should be around $17 to $20 dollars, and that is with a lot of variables.”

According to CNBC, the Financial Industry Regulatory Authority is now reviewing allegations suggesting that Morgan Stanley shared information with insiders right before the IPO began. That information, the allegations say, was negative news. The complaints prompted Massachusetts Secretary of Commonwealth, William Galvin to issue a subpoena to Morgan Stanley over the discussions the company had with investors regarding Facebook’s stock offering. After changes were made to Facebook’s S-1 filings, the revised report was then sent to Morgan Stanley’s investors before making it available to the press.

The lawsuit mentioned above was filed by a Maryland resident who sued the Nasdaq OMX Group. Phillip Goldberg says in his class-action lawsuit that the company was negligent when handling Facebook’s IPO, which in turn caused losses to investors like himself. In the documents he says that delays in the purchases caused the loss of his money. The mishandling, he says, occurred on May 18, the day Facebook began selling stock. More investors decided to sell their freshly acquired stocks after a supposed glitch prevented Nasdaq from completing numerous orders from people who wanted a piece of Facebook’s fortune. “The whole FB story is a fiasco,” said Jon Najarian, from TradeMonster.com. “The Nasdaq has blood on its hands from the locked markets they disseminated for over 2 hours.”

But the situation with Facebook’s failed attempt to sell its nonexistent value is not rooted on glitches or misunderstandings, but on the well-known impossibility of selling a product at such an unreasonable value. Those who sought to make a quick dollar have paid the price for their greed. However, it is unlikely that big investors lost money in this new chapter of financial insanity. But retail investors who did not have inside information on Facebook’s real value continued begging for shares. This fact makes anyone question whether the work of banks such as Morgan Stanley went beyond being a traditional underwriter. The same question could be asked about other Facebook underwriters such as Goldman Sachs. How much did they hype the value of the stock? How did they do it? There are other caveats to the Facebook debacle, for example whether there were any bets against the stock and how much money was made in those bets? It wouldn’t be the first time.

But perhaps more sickening is the fact that since Facebook’s initial stock offering, both Mark Zuckerberg and one of the company’s directors, Peter Thiel have sold millions of shares to collect their piece of the pie. Not even the heads of the company gave the stock a chance. As reported by Market Watch, “Chief Executive Mark Zuckerberg has sold 30.2 million shares and director Peter Thiel has sold 16.8 million shares of the social-networking company. This information was confirmed by securities filings published late on Tuesday. The gross amount collected by Zuckerberg adds up to $1.13 billion, while Thiel made $633 million.

In the meantime, neither Facebook not Morgan Stanley are willing to talk about the scandal known as Facebook’s initial public offering. But some analysts and financial writers are willing to adventure dire predictions given Facebook’s debacle. Paul B. Farrell from Market Watch believes that Facebook could destroy the little that is left of the economy. Farrell has put the social networking company in his top 12 as a candidate to sink the economy into a deeper crisis. “What’s going on? Facebook’s in trouble, that’s what. Now in the cross hairs of public scrutiny, everybody’s taking potshots. And the warnings are just beginning,” said Farrel in an article published on Market Watch.