Did Facebook Executives Privately Tell Institutional Investors to Lower Their Estimates on the IPO?

George Washington's picture

Did Facebook Feed Inside Information to the Big Boys … While Leaving the Individual Investor In the Dark?

Reader McFid – who has been a breach of fiduciary duty expert since 2003 – sent me the following article:

Today, The Daily Beast reports that certain underwriters may have lowered their revenue projections prior to the IPO AND may have informed some investors; but not all investors. I was jammed up last week and could not get the fact out of my mind that while on the road show that there would be private one-on-ones for certain investors. The general road shows surface questions, many questions over and over; there is no doubt that these questions (I wasn't there) were laser focused on revenues; whether new models compared to pre-IPO or ARPU (average revenue per user). The private one-on-ones cast extreme scrutiny on revenue numbers and assumptions - past present and future. NO DOUBT: When underwriters, no doubt listening, perhaps bristling and responding to potential investor's questions, probes and scrutiny - likely, as is often the case when more than two people look at the same set of numbers, raised some hard-to-dispose-of aka troubling issues causing them (apparently) to adjust projections DOWN; but they decided not to disseminate that to ALL investors. What are the future prospects? Some may ask with approximately 800 million users how many more would sign up in the future? And given the anti-climactic IPO fallout how many will remain active, revenue paying users? Facebook's tagline ironically is, I believe, to promote a more open, transparent and connected world. Really? There can't be a more prominent example ... of information assymetry; unequal, untimely and incomplete information - perhaps knowing, willful and intentional and approaching recission of all those IPO allocations - si?

Reuters reports:

Morgan Stanley selectively disclosed the change in Facebook estimates.

Business Insider confirms that this might be a big story:

The analysts cut their estimates because a Facebook executive told them to, a source tells us.


The information about the estimate cut was then verbally conveyed to sophisticated institutional investors who were considering buying Facebook stock, but not to smaller investors.


The estimate cut appears to have influenced the investment decisions of at least some institutional investors, dampening their appetite for Facebook stock, and crucially affecting the price at which they were willing to buy Facebook stock.


As I described earlier, at best, this “selective disclosure” is grossly unfair to individual investors who bought Facebook stock on the IPO (or at any time since).


At worst, it’s a violation of securities laws.


This latest chapter in the Facebook IPO story began this morning, when Reuters’ Alistair Barr reported that the research analysts at the company’s lead underwriters—Morgan Stanley, Goldman Sachs, and JP Morgan—had cut their earnings estimates for Facebook during the company’s IPO roadshow. This was highly unusual, if not unprecedented (I’ve been in and around the tech IPO business for almost 20 years, and I’ve never heard of it happening.)


Analysts cutting estimates is generally regarded as significant negative news for stocks. This is especially the case when the analysts who cut their estimates are thought to be very close to a company—and, therefore, to have particularly good information.




The fact that some potential Facebook investors were told of the analysts’ estimate cuts and others were not would seem to be a major “selective dissemination” issue.


It is inconceivable that a reasonable investor would consider the sudden reduction of analysts’ estimates to be immaterial to an investment decision—especially if they analysts had privileged access to the company.


The SEC and FINRA appear to have acknowledged this, and they may now investigate what happened.




One of the underwriter’s analysts has said he was told by a Facebook financial executive to cut his estimates.


According to another source with insight into the Facebook IPO process, until the underwriters’ analysts cut their estimates, demand for Facebook’s stock among sophisticated institutional investors was high. Once these investors heard about the estimate cut, however, they became more cautious about the IPO.


(Again, an estimate change like this during a roadshow is, at best, highly unusual, and it would be hard to interpret it as anything but negative. One institutional investor I spoke to said he has looked at more than 1,200 IPOs over the course of his career, and he has never heard of this before.)




Meanwhile, during private roadshow meetings, Facebook executives were reportedly “signalling” to some sophisticated investors that Facebook’s advertising revenue would not grow as rapidly as some potential investors had hoped. Facebook’s advertising business is driven primarily by company-to-company sales efforts, not by the self-serve ads that drive Google’s business. Facebook executives reportedly made clear to sophisticated investors that this would limit the rate at which Facebook’s ad business could grow.




Individual investors, needless to say, were not likely aware that the research analysts at the company’s lead underwriters had cut their estimates for the company. They were also, presumably, unaware that Facebook’s Q2 was weaker than expected.




According to one source (unconfirmed), based on the book of orders submitted by both institutional and retail investors, Morgan Stanley found that there were two distinct price levels at which investors were interested in buying stock.

Institutional investors, having digested the news of the underwriter estimate cut, were comfortable buying Facebook stock at $32 a share.


Retail investors, meanwhile, who were presumably unaware of the estimate cut, were comfortable buying Facebook at $40 a share.




The SEC and FINRA have already said they may look into the Facebook IPO process. The Massachusetts Attorney General has also just announced that has subpoenaed Morgan Stanley over the issue.

And Reuters notes that investors have already filed a lawsuit claiming securities violations:

A different civil lawsuit was filed against Facebook, Mark Zuckerberg, IPO underwriters Morgan Stanley & Co and others alleging violations of securities laws.

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mayavision2012's picture

For the sake of a little levity here:  

Never do splashy high-tech financial events just before a "ring of fire" solar eclipse occurring on the cusp of Taurus/Gemini (Money/Technology) and being slam-banged by Saturn (The Manipulator)!

Just a thought.... ;-)



Morrotzo's picture

Insider trading? Violation of full disclosure regulations? Bah, rules are for the muppets.

I wonder if they gave "private one-on-one" briefings to the Congress"men" they purchased?



erheault's picture

I just cant believe honest bankers would do this to the sheeple,  Must be that there is no honest bankers, I suppose they are all politicians now.

Normalcy Bias's picture

Did you wake up face down in a ditch, bloody and sore all over, with your wallet and watch gone?

Congratulations Muppet, you've been ButtZucked!

NEOSERF's picture

Embarrassing for the status quo because we always knew they were running up the price like the running of the bulls, and all along the smart money was taking some chips off the table and leaving Harry Idaho sitting and wondering how he took a 40% loss on a hot new stock in the first 2 weeks...

GCT's picture

Buying stock is a game of chance.  I did not buy facebook stock it was over priced to begin with.  People lost money that is what happens in the markets these days and I am not the sharpest tool in the shed.  No one will go to jail they will sue, the culprits will pay for their get out of jail card fines and move on.  As I look back,  most of the recent IPO releases have all flopped. 

The mainstram media making a big deal out of this is funny.  People lost money in the stock market whoppee doo.  Happens everyday.  Will anything change no and the media will move onto the next big ratins story.  Maybe investors will actually buy stock in a company that actually produces something for a change or invest in PM's.  Most of the commentors here , well besides MDB knew Facebook was way overpriced. Kinda sorta reminds me of the dot.com bubble bck in the day.

insanelysane's picture

The mainstream media is making a big deal of it because they are slooowly realizing they are part of the problem.  The MSM hyped the IPO with comments like it is going above 90 etc.  MSM is realizing that viewers/readers are realizing they are better off uninformed rather than misinformed or need to go to "safer" outlets to get their information.  ZH lives while MSM is dying!

GCT's picture

As I read your comment insane I should have added the MSM as pumping this stock and they too should have been brought into the investigation.  As I think about this, they may be more to blame then anyone else. Nothing will happen.  Yes ZH even with some of its doom and gloom commentors is more thorough and alot more informative then any MSM out there.  Back when Tyler did the subordination on Greek Debt many media outlets were referencing this very site. 

If nothing else I come to this site daily before any others.  ZH is almost always ahead of any other media outlets.  Plus you have total freedom to comment!  A rare commodity these days. 

Salt's picture

FB initial P/E was 88.

If my calculations are correct, when this baby hits 88 miles per hour... you're gonna see some serious shit.- Back to the future.

How true how true.


PulauHantu29's picture

Lots a Greed, according to John Bogle:

Jumping on the bandwagon was a very profitable thing to do for a while. But then the bandwagon or—the merry-go-round, to change the metaphor ever so slightly—the merry-go-round stops. It's like a game of Old Maid, as Lord Cain's told us. Somebody's always left holding the bad card. Or musical chairs; someone can't get into the last chair.

This is a classical example I think of investor greed, including institutional greed, and underwriter greed, and company greed. So the message to me is: when all the parties to a transaction are greedy, this is the kind of outcome you can expect.

Read more: http://www.businessinsider.com/legendary-investor-jack-bogle-calls-the-lousy-facebook-ipo-an-unsurprising-manifestation-of-investor-greed-2012-5?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Clusterstock%20Select&utm_campaign=Clusterstock%20Select%202012-05-23#ixzz1vhKun4Yi


falak pema's picture

FB IPO was supposed to be the iconistic expression of triumphant american enterprise, launching its new space ship into the 2012+ Odessey of the Internet galaxy. It was not supposed to be a new Titanic and acrimonious discussions about why the number of life boats could not save all those who took that prima notte ride! 

Widowmaker's picture

Dear Zuckerfucker,

When you treat investors like shit you get shit in return.

Quit acting like a spoiled brat and take some responsibility - I see this rock going under $4.


d edwards's picture

To paraphrase P T Barnum: "There's a Zucker born every minute"!

Looks like Zuck could go down in investment histrory with Ponzi and Madoff.

LoneStarHog's picture

MillionDollarBonus Strategic Plan to Own Facebook:  1) Purchase IPO "at any price" ... 2) Purchase additional shares using Dollar Cost Averaging ... 3) Continue Step 2 all the way down ... 4) Own 50.1% and announce takeover for all additional shares ... 5) Tell grandkids when they come to visit at his refrigerator carton under local Interstate passover.

XtraBullish's picture

The change in demographics and the onslaught of a newer younger group of bag holders opting against the "risky mining shares" that Grampa owns in favor of the social media bubble just further cements the notion that these markets are irrational. Zuck basically told 500,000,000 users to go borrow $3,800 from Daddy and join the "Facebook Family" by buying 100 shares. 100 shares times 500 million users = 50 billion shares of demand. Murray Pezim would be proud.

slowimplosion's picture

While I am opposed to financial fraud as much as anyone, it is impossible for me to feel any kind of sympathy for anyone who put a single dollar into something as blatantly and ridiculously overpriced as Facebook.


The Alarmist's picture

Seriously, "fairly" or "over" valued are highly subjective terms even to those who try to do a little math to arrive at them. The real problem comes from a demand-side full of people so accustomed to being pumped full of hopium that traditional valuation models either have an unjustified growth component built in or where a risk factor that should have been built into the required rate of return is left out. This is easy to do if you are Joe on the street and your model is to "Buy-Buy-Buy!" or "BTFD" because you have heard those mantras repeatedly since 1990.

Harlequin001's picture

One bad apple should not be allowed to rot the barrel. The bloody shareholders should be held responsible and made to pay dearly for this wanton bad behaviour by their chief execs. Any Facebook executive found guilty should be fined at least $10 EACH.

and a bloody good smacked wrist. That'll teach 'em.

Blatant cheating if you ask me, absolutely outrageous.

and, er, do wake me up when the SEC settles out of court again won't you...

The Alarmist's picture

Wow, all that and not one mention of Reg FD.

NuYawkFrankie's picture

Re No mention of Reg FD

- or, even more surprising, Reg Middleton.....

Setarcos's picture

It was a sad experience to see and hear Lauren Lyster reduce Reg to putty in RT.

I do not trust the 'lady' one little bit, but she is smart and informed.  And a bitch.  Watch and listen closely.  It is no accident that she wears short skirts, nor are camera angles.

Even so she digs out really good stuff ... and had Reggie floundering.  But some male guests she calls "sir".  Go figure.

WmMcK's picture

I listen to Reg, but Lauren? Sound off, just watching the legs and filling in my own (fantasy) words works for me. But then again, I also do pick me nose at red lights.
What interview were you watching? In the one I just view Reg was doing fine. I do think they'd make a nice (porn) couple, though.

The Alarmist's picture

Word! 'cept for red-light thingy.

Jason Bourne's picture

I hope they told the big boys one thing and individuals another, that would be fucking awesome! The lawyers are going to have a fucking field day.

The FB IPO will go down as the beginging of the end for all fucking bullshit IPO's. The more peole that sue that more organizations that sue the more this fucking bullshit stock drops the better for everybody - except of course for the fucking pricks that underwrote it.

FB is now one of the poster boys for eveything that wrong with Wall Street.

This IPO could be the begining of the "Wall Street Spring".. Hahhaha.

Fuck you Wall Street. Actually we don't even have to fuck you, you will by your disgusting nature fuck yourself.

Psyman's picture

Short answer: no.


Everyone knew it was a ridiculous valuation.  Nobody was hiding that fact.  Irrational exuberance was the only reason any retail investor threw money at Facebook with the intention of holding the stock long.

Setarcos's picture

"Everyone" did not know it was a ridiculous valuation.

Granted that a sucker is born fresh in this world every minute, if you'd bothered to do some research, then you'd know that the facts were being hidden deliberately.

Count yourself lucky that, despite your ignorance of facts, you did not get caught too.  And do not mock those led astray, even if you never made a mistake in your entire life?  Yes that IS a question.

Setarcos's picture

Just thunking, having read a lot about FarceBook, here and elsewhere in recent days.

First impression: pretty much everything wrong with Financialism (casino banking) and such measures as abolishing Glass-Steagal is wrapped in this IPO.

Second impression: the ultimate Ponzi scheme ... probably, but with an extra dimension and so to:

Third impression: the biggest chain-mail scam ever launched.

Thunk about it - thunk and dump - the growth of FarceBook almost totally depends on 'friends' telling 'friends' how fucking wonderful it is and what can be gained by passing on the message for minimal outlay, not even a postage stamp ... hey the gains, especially for lonely people, are near astronomical; except that our planet has a finite number of people.  But hey, you can 'friend' tens, hundreds, thousands, or even millions of people you really do not know from a bar of soap.

Yep I had FarceBook for about a year and accumulated about 90 'friends', until I thunk, "This is a total farce."  Also someone I actually knew essentially hacked me ... never mind if your data can be mined by some corporation or government agency, your troubles really start if you happen to have acquired a personal enemy; in my case an ex who bitterly resented having to make a property settlement with me.

But all that aside - except for a cautionary tale - Suckerbergs 'business model' is just like old-fashioned chain-letters and, ultimately depending on everyone on this planet "passing the message on", with minimal effort from the originator, nor those participating.

I think that the only difference between Suckerberg and snail-mail originators of chain-mail is digital, instant spread/growth globally ... but rapid downfall is going to be the same as with postal scams ... saturation point ... the point at which there are no more takers.  Seems that point has already been breached with both users and investors.

I hope that FarceBook, and all who sail in her, marks the end of casino banking and all that is wrong with Financialism, especially JPMorgan, Goldman Sachs and of course the Fed.

I hope that FarceBook/Mark Suckberg is the final "iceberg" that sinks Crony Capitalism/Fascism, though I am just "steerage" on this "Titanic" and likely will not survive ... but nor did many first-class passengers, a century ago, on that symbol of industrial/military might.

OK I got all allegorical, but I suppose some in ZH will get my drift (in my lifeboat).  Where is CD when you need him?

In the here and now I am 99% sure that FarceBook is dead in the water already ... the EU and the PNAC will take a bit longer.  Foretelling OFF.

Yohimbo's picture

People are now insane.

FB is worth ZERO.

Zero per share.

Actually is is worth some negative integer,

because its a giant fucking waste of time,and electricity.

detracting from actual productive pursuits.


BTW: fuck you Zuckerberg.



BorisTheBlade's picture

Entire market is marked to insanity. Who cares what FB is worth, few suckers who got in deserved losses. Ultimate muppets.

Everyman's picture

This GOD DAMN """MARKET""" is just about as fucking corrupt as it gets!!  Good fucking lord, with the JPM Chase loss, the MF Global Fuckup, the real question is:


"Can any of these multi billion bollar fucks make an intelligent investment or can they only make money in a loaded casino game?"  What a bunch of limp dicked, limp wristed assholes that think they are masters of the universe.  If these fucks are the "best and brightest", that means being intelligent and having good judgement means absolutely DICK!!!!


jeff montanye's picture

only make money in a loaded casino game.

if it weren't for fraud, there would be a whole different cast of characters at the top in government and business.

wang's picture
wang (not verified) May 22, 2012 9:01 PM

Business fcking Insider


George how dare you use those scum bags as a source here on ZH.

world_debt_slave's picture

no one will go to jail

alien-IQ's picture

And at what price were the insiders selling at?

Here ya go:


Looks like Mark Z. sold 30,200,000 shares at $37.58. (not a bad days pay huh?)

ebworthen's picture

"Psst...hey...this pig is going to slaughter...we'll give you some tenderloin and bacon and leave the ears and snout for those hot dog retail investors."

alien-IQ's picture

And now the class action suits begin:

Investors sue Nasdaq, Facebook over IPO

May 22 (Reuters) - Nasdaq OMX Group Inc has been sued by an investor who claimed the exchange operator was negligent in handling orders for Facebook Inc shares following its initial public offering, causing losses for investors.

In addition, a different civil lawsuit was filed against Facebook, Mark Zuckerberg, IPO underwriters Morgan Stanley & Co and others alleging violations of securities laws.


BeetleBailey's picture

Spoke to my clients about Facebook stock before all the "hub-bub" transpired last week.

Bought it up, saying this.

"Facebook IPO...your thoughts".............

Listened to them. Let them say what they wanted.......let them go on and on if need be.

Then, channeling Fred Dalton Thompson's Admiral Painter character in "The Hunt For Red October", I said to each of them;

"Now look, we're not going to touch it. We didn't get in at the subscription, meaning there ain't no big payday for us, and I don't care what the talking heads on TV tell you. Ignore them like a baying hound in the moonlight - because that's what they are.

"Facebook has circumspect revenue. A shady business model. Didn't we learn our lessons from before, watchin all those dot.coms blow up in other people faces?

buy.com...sell.com....drugs.com...deepdoo-doo.com......all rolling over in some Silicon grave.......

"Alright then....you leave it to me. You pay me to protect you.........at the silly price they're askin, I'm not touching it with a 20 foot barge pole....hence, I am protecting you."


I got none. All I have got is thanks....as some of their friends are underwater on the turkey......

The Alarmist's picture

Hell, they didn't even have a sock puppet.

Sequitur's picture

Captain Fuckerberg and the U.S.S. Farcebook. The stock of dreams! It is unsinkable.

Mr Kurtz's picture

Being one step ahead of the "bag-holders", Fuckerberg, with a "shit-eating grin", bailed out at $37.53 and walked away with 1.3 billion.


Buck Johnson's picture

I wonder if that explains why GM decided to drop it's advertising on Facebook.  For them to do this a day before the IPO is extremely strange.  This stock was cooked from the get go and individual investors and companies where finding out and didn't want any part of it.

williambanzai7's picture

I was thinking about that question last week and thought it was some sort of revenge.

The only conclusion I reached was a decision like that does not happen by accident.

The Alarmist's picture

Like, for example, high-ranking officials in a position to influence that sort of call not getting an allocation in what they thought was the hottest IPO of our lifetimes?

Careless Whisper's picture

Prior to the GM announcement, some pimply faced snot-nosed arrogant little fb nerds met with GM and told them their ads sucked because they didn't link to good content rich info on their other fb page. So maybe those execs at GM thought fb should be knocked down a peg or two.


max2205's picture

Let's give them a mulligan, have MS give everyone their money back cancel all trades. And never let FACEDOUCHE IPO again.

This will be mired in lawsuits long past all of us croak.

I am a Man I am Forty's picture

everyone knew from day one fb was trading around 27x revenue and a pe ratio of 108, what else do you need to know? i warned all of my facebook friends (ironic, isn't it?) to stay away from it, but a couple invested, one sold at a gain at 42, the other is having his ass handed to him right now

The Alarmist's picture

It's easy to be prescient on trailing figures ... but it's kind of a cheap shot. Try figuring out what the growth rate might be before tossing out the PVGO.

One reasonable forward-looking indicator that Facebook might be a flop was that their ad revenue model for mobile devices was lacking at a time when mobile users were the growing segment of their user base.