Shareholders sue Facebook and banks over IPO
Shareholders sue Facebook and banks for allegedly withholding insider information during the company's IPO.
Jeremy Hobson: Facebook stock is actually up two percent despite news that shareholders have sued the company as well as Mark Zuckerberg and several banks.
For an explanation, let's bring in Josh Brown of Fusion Analytics. He's with us live as always from New York. Good morning, Josh.
Josh Brown: Good morning, Jeremy, how are you?
Hobson: Doing well. Give us the explanation -- what are these shareholders involved in this lawsuit angry about?
Brown: The Facebook IPO has gone from a debacle to an entire fiasco. The latest headlines that broke last night were allegations that Facebook may have passed on financial to the underwriters' banks then selectively disseminated that information the banks' largest hedge fund clients. That's what may have gotten that big order cancellation thing rolling which ended up leading to a collapse of the share price on the opening day that's now continued for three days.
Hobson: You're saying that people at Facebook got in touch with particular investors and said, 'sell your stock, things aren't going to be as good,' or what?
Brown: This is what journalists are reporting as of last night. So in other words, mom and pop did not have access to the information that revenues were supposedly slowing, but larger investors did. And so, all of the sudden, there were a lot of institutions that were counted on to be buyers, that's how they got that high valuation; that buying dried up and so those institutional investors backed-off. Essentially mom and pop were left holding the bag. People that were excited about getting involved with the deal, all of the sudden were left with something that was literally dropping on them from ten stories above.
Hobson: This may be illegal, and Josh, why does this matter to people that are not invested in Facebook?
Brown: Well this should matter to everyone, anyone that's got any kind of investment in any company. We passed something called Regulation Fair Disclosure or Reg FD back in 2000. This coincided with the democratization of investing and online trading, et cetera. And that rule was put into place to protect mom and pop from this kind of exclusionary activity, this kind of asymmetric information dissemination.
Facebook was a private company at the time this happened, so that might just be enough for the underwriting banks to escape the noose. It's certainly unethical even it's not illegal, and I think people should be disgusted with the fact it's still a club and nothing has changed.
Hobson: Josh Brown of Fusion Analytics.