In addition to substantial IPO fees, the Facebook underwriters headed by Morgan Stanley made “a profit of about $100 million” through an options bet which benefits the banks when the IPO price is too high and the stock value plummets. (See “Morgan Stanley, Others Make Profit of $100 Million Stabilizing Facebook,” Gina Chon, Aaron Luchetti and Ryan Dezember, The Wall Street Journal). This profit comes at the expense of individual investors who buy the overpriced stock at or above its initial purchase price. On May 9th Facebook told its underwriting banks that its growth prospects were slowing down due to an increasing mobile user base.
Instead of releasing this information to the public, the underwriters set the price to $38 representing a historically high price to earnings ratio. This may seem strange for a company with questionable growth prospects. The Facebook Underwriters, headed by Morgan Stanley, also had an “overallotment option” which effectively made them short Facebook stock (See “Morgan Stanley’s $2.4 Billion Facebook Short,” Felix Salmon, Seeking Alpha ?). This scheme gave the banks a huge payout if the stock price tanked; unfortunately, these profits come at the expense of individual investors who overpaid for their stock.
Lawsuits have been filed against Facebook and its bank underwriters less than one week after the IPO. The banks are being investigated for withholding information to individual investors for the benefit of personal profit and their larger clients (See “Lawsuit says investors didn’t get all Facebook data,” Adam Shell, USA Today). There is a push for a class action lawsuit which seeks to remedy all individual investors who were hurt by Facebook’s plummeting stock value.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.