Facebook’s short life as a public company has been tumultuous, with its share prices plunging by about 13% on Tuesday. This means that its founder Mark Zuckerberg, who made $19bn on Friday, has lost $2.055bn in the three days since. Now the social network is facing lawsuits amid accusations of insider trading.
As Facebook shares continued their slide, regulators launched inquiries into whether privileged Wall Street insiders were alerted to the company’s weakening financial projections, leading them to shun the stock or dump shares just as buying was opened to the public.
The legal backlash has already begun. On Tuesday, Maryland investor Phillip Goldberg sued the stock exchange in federal court in New York, accusing it of failing to timely execute trades, causing him and others to lose money. The suit seeks class-action status.
The lawsuit accuses Zuckerberg, Facebook and several banks led by Morgan Stanley of hiding the company’s weakened growth forecasts ahead of its $16bn initial public offering.
The defendants are claimed to have concealed from investors during the IPO marketing process “a severe and pronounced reduction” in Facebook revenue growth forecasts.
Morgan Stanley, which led the Wall Street effort to bring the social network public, came under fire following reports that the bank had told some favoured clients that the bank was cutting its revenue estimates for Facebook.
Morgan Stanley has defended its role in the float. Pen Pendleton, a spokesman for the New York-based investment bank, said in an e-mailed statement: “Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations.”
“In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information. These revised views were taken into account in the pricing of the IPO,” Pendleton added.
The lowered expectations came after the tech giant expressed caution in a public filing about its advertising sales on mobile devices.
Facebook’s offering was one of the most hyped events on Wall Street, and became the biggest tech IPO in history.
The company raised $16 billion by listing on the Nasdaq Stock Market in a move that valued the company at $104 billion, which is bigger than American corporate stalwarts such asMcDonald’s and Amazon.com.
Facebook’s shares were delayed by two hours on its first day of trading, and investors complained of glitches in confirming that trades even took place. Shares never finished the first day of trading with a big surge, and have plunged 26% since Friday.
Securities lawyers said the IPO’s problems could invite lawsuits from angry investors and others against their brokers, Nasdaq, Morgan Stanley and potentially even Facebook.
Rupert Staines, Managing Director of behavioural targetting firm RadiumOne said the social network must adapt to justify its huge share price tag.
“The rapid fall of Facebook’s share price following last week’s IPO is hardly surprising. If you were to compare it to Google’s valuation after eight years of existence, Facebook would appear to be considerably overpriced. Understandably Facebook will have to respond by increasing commercial messaging throughout the network, but one has to question whether it is at risk of alienating its dedicated users, by saturating them with wall to wall ads. And then there is the question of whether, even if the advertising strategy is successful, it will be enough. They will have to look to alternative revenue streams where they do not have the expertise, such as mobile.
“Facebook is an amazing business, with an phenomenal forward-looking vision to the web – there is no doubt in my mind that consumers will continue to use it. However, we have to look at the realities of how Facebook will make its money. If we’re lucky, their huge public value will leave the door open for some innovative social advertising across the whole open web,” Staines added.
