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Facebook IPO Nosedive Gets Facebook IPO Class Action Lawsuit

Illustration for article titled Facebook IPO Nosedive Gets Facebook IPO Class Action Lawsuit

It's been more and more apparent that there was some shady—though not necessarily illegal!—activity from Facebook's bank advisors in the lead-up to the company's IPO last week. And now, investors who got the shaft are trying to get their money back through the courts.

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At issue: Morgan Stanley, Facebook's IPO sherpa, was encouraging its client to up its initial price while at the same time cutting its estimates for Facebook's future financial success. What's worse, they managed to whisper that last bit into the ears of their giant institutional clients while managing to keep it obscured from Joe Investor. Who is now, understandably, pissed.

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As Business Insider reports, Facebook shareholders have filed a class action suit against both Facebook and Morgan Stanley, claiming that Facebook's prospectus—basically an overview of the company's financial health and various risks related to investing—contained false information. A serious allegation, but one that seems more and more likely to be true by the day. Adding to Facebook's woes: The case will be handled by Robbins Geller, the same firm that took down Enron for $7 billion.

It's too early in the proceedings to know whether this would actually ever go to court (unlikely!) or how much Facebook would end up on the hook for in a settlement (lots!). But what is clear is that there are a lot of unhappy investors out there who allegedly got taken for a ride. Good for them for wanting to get to the bottom of it. [BusinessInsider]

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DISCUSSION

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I picked off some shares at $31.50 a couple days ago. Since then the price seems to be hovering slightly above that level, so I'm fine sitting on my shares for a while. I'm feeling kinda good about my investment, so please excuse any smugness that follows. ;)

I understand why people are all up in arms like OH NOES FACEBOOK MISLED INVESTORS LET'S SUE THEM. They got burned, and found something that Facebook did—revise its revenue projections downward right before the IPO but only tell certain people—which gave an opening to sue to recoup lost money.

BUT...

Before its IPO, Facebook sold tons of private shares to big institutional investors like Goldman Sachs. Everyone who owned these shares obviously wanted to maximize their value. So Facebook hyped the hell out of its IPO to drive up the price, and give that much larger of a payday to the people who owned shares pre-IPO. These investors, and other big shareholders like execs & long-time employees, all unloaded a ton of shares on IPO day.

If you look at the last few over-hyped consumer internet IPOs like LinkedIn and Pandora, the common trend is that the stock price didn't quite live up to the hype. Facebook is way bigger and was way more hyped than these other companies, but still ended up following a similar pattern.

Neither of these points were secret information. Putting aside the other stuff about withholding information from investors, this was enough to signal that the smart money was on:

1. Making a quick buck through shorting the stock. Borrow shares at some over-inflated price created during IPO-day hysteria then wait for it to tank & buying back the same number of of shares at a much lower prices before having to give back the borrowed shares.

2. Waiting for the price to cool down and then buying as a longer-term investment.

As a medium- or long-term investment, I think facebook has tons of potential. It's a service that hundreds of millions of people have woven into the fabric of their daily lives, into which they barf all kinds of personal information. So I chose door #2.

The information that Facebook selectively shared with certain analysts and didn't publicize, is that their ad revenue is down because more people are looking at facebook on mobile devices than the regular site, and facebook doesn't yet have any ads on their mobile site or apps.

This doesn't change my opinion about Facebook as a longer-term investment. So they don't yet have mobile ads. Big deal. I highly doubt that Facebook on our phones & tablets is going to remain ad-free forever.

Then again, I'm just some geek who reads too many tech blogs and parlayed some of that collected information into an investment choice. I could be totally off base.