Facebook's rocky debut on the stock market has taken another turn for the worse. Shareholders have filed lawsuits against the company and the banks handling its IPO, claiming that Facebook and its partners duped prospective investors. The suits cite a Reuters story reporting that Morgan Stanley, the chief underwriter of the IPO, lowered its forecast for Facebook's revenues just before the IPO and shared that information with only a handful of its big-time clients. Government regulators are also investigating Morgan Stanley on suspicions of foul play. Meanwhile, Facebook shares remain well below the starting price of $38, a sign that investors are not as keen to own a piece of the company as the pre-IPO hype suggested. But not everyone involved in the IPO is having an absolutely horrible week. Who won in the Facebook IPO and who lost?
Mark Zuckerberg and other insiders
The Facebook CEO and other early investors — including hedge funds, venture capitalists, Facebook executives, and U2 frontman Bono — all benefited from the whopping $16 billion that the company raised on its first day of trading. They sold their shares at around the $38 IPO price, leaving eager investors with stock that quickly plummeted in value.
The mania surrounding the Facebook IPO was an optimal scene for high-speed traders who use computer algorithms to make money off split-second transactions. "This means that if a major investor is about to buy a large amount of a company's stock, these high-speed traders can buy shares ahead of them and then resell the shares, seconds later, for a profit," says Dean Baker at Britain's The Guardian.
Investors who sold high
Facebook's share price actually rocketed to $45 in the first hours of trading, which means some savvy investors have "swollen" hands from "the high-fives [they've] been getting because they managed to dump the stock on some other poor slob while the price was still above water," says Mark Gongloff at The Huffington Post.
Even if Zuckerberg made out like a bandit, "Facebook's stock continues to perform more embarrassingly than your grandmother on Facebook," says Adrian Chen at Gawker. Shareholder lawsuit aside, the social network also has to face questions about Morgan Stanley's pessimistic forecast, which indicates "Facebook is still struggling to figure out how to make money off its continent-sized audience," says Derek Thompson at The Atlantic.
The chief underwriter of the IPO is getting slammed for setting Facebook's share price too high and selling way too many shares, a combination that weakened demand and sparked a flurry of selling. Morgan Stanley could also be in legal trouble if it turns out that the investment bank was "cherry-picking which clients were privy to the fact that its analysts had dimmed their outlook on the social network," says Steve Schaefer at Forbes.
The exchange has admitted that its technology couldn't handle the large volume of trades on opening day, a black eye for a stock market that has advertised itself as the go-to exchange for tech companies. The snafu caused trading delays and prevented orders from being confirmed, which "certainly played a role in the IPO's failure as a number of high-priced orders never went through by the time closing bell sounded," says Matt Rego at ValueWalk.
When you add up Morgan Stanley's alleged shady backroom dealings and Zuckerberg's massive pay day, it's easy to see why the Facebook IPO "is being seen as yet another Wall Street betrayal," says Taylor Marsh at her blog. Regular investors got screwed while "insider type information protects the Wall Street elite."