The Shocking Story of What Really Happened Inside Facebook's IPO

Employees share a high five by Facebook headquarters May 18. GettyBy Henry Blodget

And now for some more bombshell news about the Facebook IPO...

Earlier, we reported that the analysts at Facebook's IPO underwriters had cut their estimates for the company in the middle of the IPO roadshow, a highly unusual and negative event.
What we didn't know was why.
Now we know.

The analysts cut their estimates because a
Facebook executive who knew the business was weak told them to.

Put differently, the company basically pre-announced that its second quarter would fall short of analysts' estimates. But it only told the analysts about this.

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" of the estimate cut is grossly unfair to investors who bought Facebook stock on the IPO (or at any time since) and didn't know about it.
At worst, it's a violation of securities laws.

This latest chapter in the Facebook IPO story began Tuesday 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 very close to a company -- and, therefore, are thought to have particularly good information.

(In the old days, before the implementation of Regulation Fair Disclosure, companies used to manage the market's expectations by telling trusted analysts to change their estimates. Reg FD banned that practice.)

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

It is inconceivable that a reasonable investor would consider the sudden reduction of the underwriter analysts' estimates to be immaterial to an investment decision.
More broadly, everyone is still trying to understand what happened with the pricing of the IPO, which was hyped up to be the offering of the century. We now have some more information on that.

Given the PR and legal disaster that the Facebook IPO is rapidly becoming, most official communications channels have gone silent. Facebook declined to comment. Morgan Stanley did not return a call and email seeking comment.

We have spoken to several sources familiar with aspects of the transaction. We do not have complete details yet, but a general picture of what happened is starting to take shape. For now, please regard most of the information below as scuttlebutt, as it has not yet been confirmed.

Click here to read the rest of the story.

More from Business Insider:
The First Official Inquiries Into Facebook's IPO

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Short cut: Buyers got screwed.

May 25 2012 at 10:21 AM Report abuse +1 rate up rate down Reply

, I think that Facebook should have been priced at about $22. When you consider the company only makes revenue off ads. that aren't even on mobile device apps. and that their actual earnings over the past 8 years are over 25 times lower than they are valued at, it is obvious why most consider them such a risk! I have a website that has addressed Facebook and its surrounding social media sites fairly in depth over the past few days. It is Looking at this now is risky, but when you look at a site like Pandora, which is boosting more members than even, has revenue coming in from different facets, I believe it is a better media buy. I bought it and had a 11% increase on it shortly after this week and I don't think it is nearly close to finished! For more updates please visit my site.

May 25 2012 at 2:16 AM Report abuse rate up rate down Reply

This is not news, anytime you have people involved in anything to do with money you have to expect what happened. Everybody wants to get rich quick and the people who put together IPO's know this, and they look for suckers. Most IPO's flop, and within a few years the IPO company is out of business. Wall street thrives on suckers, or muppets or whatever the current term is for suckers. If you don't know what you are buying you deserve to lose everything and on the flip side the people clever enough to figure out a way to make you part with your money live the life of kings at your stupid expense.

May 24 2012 at 7:58 PM Report abuse rate up rate down Reply

Selective information dispersal....hmmm....sounds like business as usual for any of us regular joes not getting the same information as the top 2% ers. And we find this to be news? Nothing unusual here, just move along, nothing to worry about....
This is EXACTLY what happens every day of the week, every month of the YEAR, insiders on Wall Street know and understand what is happening and more importantly WHY. The rest of us are blind guessing trying to make a penny or two instead of the lousy rates the banks are paying for savings accounts and CDs.
There is no FAIRNESS or Honesty or Accountability from the Wall Street Crowd or from the Banking Financial Institutions, just ask the Federal Government to regulate and see what happens. All the Crooks lobby until they are free to remain acting like guidos in Vegas, and financially rape anyone foolish enough to give them their money or take out a loan, or invest in IPO's. Hang them all says I.

May 24 2012 at 7:39 PM Report abuse +1 rate up rate down Reply

I do not feel sorry for anyone who got stock for Facebook. They will be outdone by someone else in a couple of years.

May 24 2012 at 7:38 PM Report abuse rate up rate down Reply

Other then having the ability to post or have your friends post silly things like how many beers they drank over the weekend or how bad there boyfriend or girlfriend is can anyone out there in the world explain just what it is that facebook produces that will make money in any way? They have these strange little ads that people would only click on by mistake . I for one have not seen anything that would convince me to buy into this company. As Warren Buffet said. I will not be buying into Facebook. Good enough for me. He is one of the smartest investors in this world.

May 24 2012 at 7:22 PM Report abuse rate up rate down Reply
1 reply to bertnernie229's comment

They ad client pay a fee to Post thier Ads for a certain time days, months or years. Each time an ad is loaded up on a webpage they are charged a fee. Then if the user clicks on the ads, it redirects them to the clients site and then facebook charges a referral fee for the redirect.
So over times if say they charge 1 cents to show the add and 300mil people see it over 1 year, that $3million charge, then if say 100mil of those that seen it, clicked the link and FB charged 5cent for redirect, thats $5million. So FB would get 8million in ad fees for the year. This is all rought since i done know the fees. But its based of type, size of add and also any other special things the clients want.
So that why they say users are worth little over $4 a year for the views and clicks.

May 24 2012 at 7:48 PM Report abuse rate up rate down Reply

Oh, the REGULAR investers didnt get the INSIDE information,verrrrry interesting !!!!!!!!!

May 24 2012 at 7:12 PM Report abuse +1 rate up rate down Reply

Look at Facebook through Google Goggles but don't Giggle at the Gaggle of Gnashing Teeth. Or, whatta deal....Al-

May 24 2012 at 7:01 PM Report abuse rate up rate down Reply

This is the biggest bunko scam pulled on the american public in years. Matt Zuckerburg and the people at Morgan Stanley are thiefs and belong in jail.

May 24 2012 at 6:53 PM Report abuse +1 rate up rate down Reply

after GM pulled 10 million dollars out of advertising on Facebook why would anyone invest in it? To be worth more than ford and disney is rediculous. I'm wondering if this is a plot for the government to take it over. Might be too big to fail. Fools and their money soon part.

May 24 2012 at 6:52 PM Report abuse +2 rate up rate down Reply