Not a week went by after Facebook’s supremely hyped, but ultimately lackluster, initial public offering (May 18th) when the company, its IPO underwriters, and even Nasdaq itself had all been sued in court by aggrieved investors. Moreover, three regulating bodies had also begun informal investigations into its entire IPO process: the Securities and Exchange Commission, the Senate Banking Committee, and the House Financial Services Committee. What went wrong?
Facebook’s IPO was messy; and it just so happened that everyone in the U.S. and around the globe were paying very close attention, even if not investing. But among those who did, many ended felt they had been duped into buying stock that seemed like a sure thing after Facebook’s stock failed to pop and, worse, continued to fall as the week progressed.
The aching splinter was that in the IPO’s eleventh hour, the investment firms underwriting the IPO (Morgan Stanley and Goldman Sachs among them) contacted their biggest investors to share new data suggesting that Facebook would have lower earnings than the initial forecast indicated. Smaller investors were not given the same benefit. Consequently, the biggest investors sold fast. There was also litigious grumbling about unacceptable incompetency over at Nasdaq that left investors in the dark about how many stocks they actually had at a given moment.