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Facebook IPO Lawsuit A Front For Imprudent Investing

Francesca Bessey |
May 27, 2012 | 4:30 p.m. PDT


Zuckerberg's Original Facebook Profile (niallkennedy, Creative Commons)
Zuckerberg's Original Facebook Profile (niallkennedy, Creative Commons)
Mark Zuckerberg has done it again: he's managed to get himself sued by another group of people he screwed out of a large sum of money. The catch, though, is that the plaintiffs (once again, as Zuckerberg would claim) don't necessarily deserve the cash after which they're clamoring.

The class-action lawsuit filed Wednesday against Facebook, Inc., and the Wall Street banks that underwrote Facebook's initial public offering (IPO) on the stock market, alleges that the defendants hid the company's weakened growth forecasts from investors. Regardless of whether or not these allegations are true, disgruntled Facebook investors seem to be neglecting a major component of their lowered stock value—their own judgment.

Decrying “false and misleading” trade practices is an easy way to avoid personal responsibility for a bad investment decision. Granted, it isn't easy to make a good investment decision; the nuances of the stock trade can confuse and drive any intelligent person to the brink of insanity. But Facebook's stock was marked by huge red flags from day one, warning signs easily perceivable with a bit of common sense.

Shareholders filing the suit have claimed that research analysts had lowered their business forecasts for Facebook during the IPO process, but that this decrease was “selectively disclosed by defendants to certain preferred investors.” If this is the case, then Facebook and the banks that underwrote its stock failed to fulfill their obligation of honesty to the investing public. That's wrong.

But any prudent investor should know never to take any company's word that the company is moving in a positive and profitable direction. Enough people have gone to jail for reasons involving investment fraud, trade secrets, and other shady stock market dealings (Martha Stewart anyone?) to indicate that investors must be on their guard when buying and selling stock. They should be as informed as possible about the company in which they are investing, and the market forces that dictate that company's progress.

They should also understand that investing is, by its very nature, a risky business. For every person who makes a fortune on the stock market, another person loses everything. An individual automatically enters into investment with a 50 percent, or greater, chance of failure. But not if that individual performs careful research into the companies in which he or she might invest, and considers the chances of the stock of those companies increasing in value. If such consideration is taken before investing, one's odds of success in the market increase. Therefore, in this kind of market, no investor can claim misfortune is unforeseeable.

This is especially true in the case of Facebook, a company whose revenue is entirely dependent on advertising. Facebook does not produce anything, and even the service it offers does not generate any income in itself. The typical Facebook user is left out of the financial exchange entirely. This means that Facebook's profits are not necessarily consumer-driven, making it more difficult to predict whether profits will rise or drop.

The issue is compounded by the fact that Facebook is more and more frequently being accessed from mobile devices, a sphere of communication that large-scale advertising has yet to penetrate. This is one thing we can predict: less opportunities to advertise means less money coming in from advertisers and less money for Facebook overall.

Investors left scratching their heads at their plunging stocks should also consider the fact that Facebook just might be on its way out. We live in a rapidly changing world, especially where the internet is concerned. Websites, particularly trendy ones, tend not to have a long shelf life, and Facebook has already been around for eight years. Meanwhile the growing popularity of alternative social networking sites like Tumblr and Twitter means people spend less time on Facebook and more time elsewhere online.

Facebook has also garnered criticism for its questionable privacy policy, which changes even more frequently than the site's interface. As public frustration with Facebook grows, there's always a chance that some entrepreneurial individual might swoop in and invent the next big thing, rendering Facebook obsolete.

The stock market is always a dangerous arena to enter. In the case of Facebook, we could have, and should have, seen the danger from a long way off. Facebook may not have dealt fairly with the public, but the public needs to make sure that they are dealing fairly with themselves, and thinking carefully before they invest.


Reach Contributor Francesca Bessey here.



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