May 24, 2012

Facebook IPO Is Too Good To Be True

Michael Harper for RedOrbit.com

Though it's only been around for a short time, there have been many aspects to Facebook which have seemed too good to be true. When it first came on to the scene, only certain colleges and universities were allowed to be included. Each institution had to make a plea to the fledgling social networking company to be a part. Facebook later opened up to the world, allowing access for all, even companies and businesses. We could reunite with old friends and gather with loved ones, even stalk potential loved ones. It all seemed too good to be true. As it turns out, it was, as various privacy concerns came to light, and we all became aware that we were the ones being sold. Facebook began using our photos and data in third party ads, planting the “off-switch” deep within their obscure privacy settings.

Now, as the world sobers up after the long built hype of their $100 billion IPO, we´re beginning to realize that maybe Facebook isn´t all it is cracked up to be. Stock currently hangs around the low $30 mark–$8 less than where it started – and lawsuits are being hurled at Zuckerberg and crew.

According to Forbes, at least 3 lawsuits have been filed against Facebook over their poor performance during their IPO last Friday, just days ago. One such lawsuit alleges Facebook´s SEC filings just before going public include “untrue statements of material fact,” as Facebook changed the filings last minute to reveal they were having trouble milking money from their mobile users.

According to the lawsuit:

“The true facts at the time of the IPO were that Facebook was then experiencing a severe and pronounced reduction in revenue growth due to an increase of users of its Facebook app or website through mobile devices rather than a traditional PC such that the Company told the Underwriter Defendants to materially lower their revenue forecasts for 2012. And, defendants failed to disclose that during the roadshow conducted in connection with the IPO, certain of the Underwriter Defendants reduced their second quarter and full year 2012 performance estimates for Facebook, which revisions were material information which was not shared with all Facebook investors, but rather, was selectively disclosed by defendants to certain preferred investors and omitted from the Registration Statement and/or Prospectus.”

This lawsuit lists Mark Zuckerberg, CFO David Ebersman and Chief Accounting Officer David Spillane as defendants.

Essentially, in the days leading up to their rockshow-esque IPO, Facebook´s early investors and underwriting banks secretly changed their forecasts of Facebook´s revenue, without telling anyone other than their cohorts at hedge funds and investment banks. As such, these principal investors cut back their investments so as not to lose their shirts. The public, on the other hand, continued to feed the frenzy, boosting expectations much higher than they ever should have been.

“Facebook was whispering in the ears of the lead managers of its investment banks, on the understanding that the results of those whispers would remain available only to select clients until after the IPO was over," according to Reuters.

In light of this news and these lawsuits, the May 16th increase of shares by private Investors seems all the more suspect.

In addition to these lawsuits, Massachusetts Secretary of State William Galvin has subpoenaed the company and is investigating their main IPO underwriter, Morgan Stanley.

“It is so important that we not allow this situation to go uninvestigated,” Galvin told ABC News.

“So many investors have lost so rapidly so much. We intend to move quickly. We need to get answers for average American investors.”


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