Facebook IPO Lawsuit A Front For Imprudent Investing
Comments (5)
Zuckerberg's Original Facebook Profile (niallkennedy, Creative Commons)
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.
Comments
Martha Stewart was of no relevance to this diatribe. She made a puny, personal, legal stock sale that had no connection to her corporate position or company. There was no evidence for the trumped-up charges against her, including the big-time, bizarre charge with 10 years prison and a $2 million fine that was thrown out in court as baseless and never went to the stealth juror and the kool-aid drinking, proletarian jury. Martha Stewart went to "jail for reasons" of grossly inept legal representation on her legal stock sale. With competent legal representation, there would have been no Martha Stewart case.
The falsehood on Martha Stewart in this diatribe is propaganda that is an abuse and misuse of free speech and the freedom of the press.
I have a hard time believing "Securities Lawyer" is a "securities lawyer" if he/she writes "bankers and the company are obliged to give the same information to all the people they speak to, no playing favorites." Correction: there is no way "Securities Lawyer" is a securities lawyer.
Really, SL? Bankers are obliged to not play favorites? Hmmm, I wonder why I can't mosey on over to jpmorgan.com then and get access to sell-side research. Ah, because they charge for it? But I thought they were obliged to give out information for free? What if I'm a tiny retail client. Do I get access to the same knowledge that a hedge fund prime brokerage client who spends millions of dollars a year gets? Of course not! Nor is there anything wrong with this. This is *business*. Just like how I can fly first class on United for the same rate you pay for Coach because my frequent flyer status with them (equivalent to having spent so much, I'm toward their top end of customers) means I'm more important.
The overriding lesson from Ms. Bessey's article is "caveat emptor." Do you really mean to challenge this message -- that one shouldn't blithely wander into securities markets without doing their research -- about dealing with Wall Street? Do you believe this advice is so off that you feel the need to condescend?
Imprudent investing? Really? How about the fact that Facebook called a group of analysts to report a material change to their business without making that information public? The Analysts then call their Desks to inform them of a chang in their price target, which then flows to their institutional investors, but not to the general public. Had I known about the conf call details, I would have cancelled my orders too.
Or how about the issue with the Nasdaq telling the Brokers that anyone filing a claim for recompense against them would need to do so by late day Monday, which caused all the Big Boys to dump the stock, lock in their loss & force the price down through 31? It looked so bad at the time that I thought the stock would crash.
I was watching CNBC that morning, as I usually do. I sold at 9:35 (5 mins after market open) while the price was 32, it executed in less than a second & the price was already falling through 31. And no, I'm not a day trader. I watch on my iPad while I work at my "real job". After 25 yrs on The Street, old habits die hard. I'm used to seeing - if not hearing - the channel all day.
There were clear violations of securities law combined with lack of communication & sheer stupidity.
1) The material change in the company's outlokk REQUIRED them to re-file their SEC docs. They didn't.
2) Said material change was supposed to be made public, it wasn't.
3) The Nasdaq's position on recompense was not made public, as it could have been by a simple call to Bloomberg, CNBC, or Reuters. Each of which has easy access.
4) When their order book got overwhelmed on Friday prior to open, they should have suspended trading publicly, as the NYSE has done before. Stated that their order books were jammed with large number of transactions & that a 'real' price was not available. And that trading would resume as soon as all the orders were worked out and a good price available.
I've been trading for a while for my retirement account. I used to work on The Street writing trading software. I'm not a newbie, not am I a day trader. Had they filed their documents updating their status, Bloomberg, CNBC, Reuters et al would have picked up on it and reported real time.
Given all this, do you really think you have any place speaking condescendingly to those of us that got hosed by incompetence and insider trading? Who relied on The Process to work and it obviously didn't? I've made and lost money investing and have never considered a lawsuit. This time? I'll sue the crap out of them all.
Imprudent investing? Really? How about the fact that Facebook called a group of analysts to report a material change to their business without making that information public? The Analysts then call their Desks to inform them of a chang in their price target, which then flows to their institutional investors, but not to the general public. Had I known about the conf call details, I would have cancelled my orders too.
Or how about the issue with the Nasdaq telling the Brokers that anyone filing a claim for recompense against them would need to do so by late day Monday, which caused all the Big Boys to dump the stock, lock in their loss & force the price down through 31? It looked so bad at the time that I thought the stock would crash.
I was watching CNBC that morning, as I usually do. I sold at 9:35 (5 mins after market open) while the price was 32, it executed in less than a second & the price was already falling through 31. And no, I'm not a day trader. I watch on my iPad while I work at my "real job". After 25 yrs on The Street, old habits die hard. I'm used to seeing - if not hearing - the channel all day.
There were clear violations of securities law combined with lack of communication & sheer stupidity.
1) The material change in the company's outlokk REQUIRED them to re-file their SEC docs. They didn't.
2) Said material change was supposed to be made public, it wasn't.
3) The Nasdaq's position on recompense was not made public, as it could have been by a simple call to Bloomberg, CNBC, or Reuters. Each of which has easy access.
4) When their order book got overwhelmed on Friday prior to open, they should have suspended trading publicly, as the NYSE has done before. Stated that their order books were jammed with large number of transactions & that a 'real' price was not available. And that trading would resume as soon as all the orders were worked out and a good price available.
I've been trading for a while for my retirement account. I used to work on The Street writing trading software. I'm not a newbie, not am I a day trader. Had they filed their documents updating their status, Bloomberg, CNBC, Reuters et al would have picked up on it and reported real time.
Given all this, do you really think you have any place speaking condescendingly to those of us that got hosed by incompetence and insider trading? Who relied on The Process to work and it obviously didn't? I've made and lost money investing and have never considered a lawsuit. This time? I'll sue the crap out of them all.
Stay in school and learn a thing or two more. The investment bankers and the company have a LEAGAL obligation to be honest with the public and the stockholders about their forecasts, even if you think their moral obligation has been eroded by the behavior of their predecessors. (BTW Martha Stewart did not go to jail for anything she did wrong with her own company, poor example.) Moreover, the bankers and the company are obliged to give the same information to all the people they speak to, no playing favorites.
Just because some companies break the rules it does not follow that the investing public should assume that all companies are breaking the rules. That would create a system of distrust and disorder and our banking system (or stock market) runs on confidence. We can not have a system that assumes that they are all lying to us all the time, though a trust and verify system is a good idea for any investor.
Your system where the companies and bankers can say whatever they want and the buyer beware would take us back to 1929! We have already skated way to close for comfort to that place recently. Perhaps you should learn a little more about the "R" word and the history behind our current regulatory regime before you write your opinions.
My advice, stay in school and do you due diligence there before you try your hand in the real world.