The Facebook Fiasco Confirms that Wall Street Views Smaller Investors as Second Class Citizens


Facebook made national headlines last Friday when the social networking giant sold shares to the general public in its IPO. The company is now making even more headlines as investors have filed lawsuits against it and all of its underwriters alleging that they released material information to only “preferred investors” (See “Facebook, banks sued over pre-IPO analyst calls,” Jonathan Stempl and Dan Levine, Reuters).

The investigations focus on information that Facebook gave to its underwriting banks, headed by Morgan Stanley, including information that warned against Facebook’s future revenue growth. Facebook had seen a drop in ad earnings from mobile users; this apparently raised serious questions regarding Facebook’s earnings growth in the opinion of many analysts (sounds like the experts thought it was important). The banks disclosed this information to large hedge funds and other preferred clients but not to mom and pop investors.

The investment firm Capital Research and Management “armed with information from a May 11 “roadshow” meeting with underwriters and Facebook, along with similar estimates of their own, slashed the number of shares it intended to buy” (See “Some Big Firms Got Facebook Warning,” Gina Chon, Jenny Strasburg and Aupreeta Das, The Wall Street Journal). After getting this nonpublic information, many large investment houses decided that the historically high price to earnings ratio for a company with dwindling growth prospects was simply not worth it. Unfortunately, individual investors never had an opportunity to consider this developing information. Would individual investors who were never given this information have lost so much money if the banks disclosed the facts to everyone? We think not.

Of course, the underwriting banks walked away with tens of millions of dollars in excess profits.

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.