Facebook Shares Going From Bad to Worse

Legal actions and poor stock performance mark first year of trading
By Heide B. Malhotra
Heide B. Malhotra
Heide B. Malhotra
June 6, 2013 Updated: June 6, 2013

It has been a little over a year since Facebook, the social networking company, made its stock market debut. Since then, it has been mostly downhill for the company, its book runners, investors, and the exchange it trades on.

After much fanfare and overwhelming investor demand, Facebook’s IPO price was raised multiple times to $38 on the night before its debut. The first trade that came in on the morning of May 18 was still $4 above the offer price, but the stock soon reversed course.

After closing at $38.23 on the first day of trading, Facebook shares (NASDAQ: FB) fell by over 53 percent to $17.55 by Sept. 4, 2012. Insiders cashed out and a disillusioned public followed suit. The stock has regained some ground to $23.10 as of June 4, but still trades 39 percent below its IPO price. What’s worse, the Nasdaq composite index is up 16 percent since then, so Facebook has been underperforming by a whopping 55 percent.

Retail and institutional investors got burned by the IPO and the reputation of the stock underwriters has suffered as well. Price and volume patterns on the first couple of days of trading suggest that the brokers who launched the IPO (Morgan Stanley, Goldman Sachs, among others) bought a lot of stock to support the price in order to avoid a publicity disaster. They did not avoid the disaster and ended up with a big losing position on their books.

Some analysts, however, think the underperformance is a normal transition phase for a tech-IPO that was overpriced.

“Facebook is going through the same maturation process that many rapidly growing tech companies have gone through. It is transitioning from hyper-growth to steadier growth, and the stock ‘multiple’—the price that investors are willing to pay for the shares relative to the company’s earnings—is dropping accordingly,” suggests a May 30 article on the Yahoo Finance website.

Not Immune to Lawsuits

Other issues, however, are not just part of the ordinary growth process.

On May 23, 2013, Robbins Geller Rudman & Dowd LLP, a securities law firm that has successfully represented clients in high-profile class action lawsuits, filed a class action civil action against Facebook, Inc., its founder Mark Zuckerberg, several senior executives, and its underwriters, including Morgan Stanley and Goldman Sachs. The lawsuit is published on the Business Insider website.

The complaint reads that the underwriters withheld information concerning Facebook’s IPO. The registration statement and prospectus allegedly contained false statements that materially affected the decision of an investor.

Furthermore, lead underwriters Morgan Stanley, J.P. Morgan, and the Goldman Sachs Group Inc., reduced their earnings predictions and informed only a few of their clients, shortly before the IPO. Around the same time, Facebook revised its prospectus, suggesting possibly reduced revenue growth.

The people bringing forward the class action lawsuit lost out, having bought Facebook shares for $7 per share higher than the accused, and suffered a $2.5 billion cumulative loss as a result, according to the lawsuit.

Nasdaq Slapped With Largest Penalty

Not only underwriters and investors were damaged though.

The U.S. Securities and Exchange Commission (SEC) on May 29, 2013, charged NASDAQ and its associated NASDAQ Execution Services (NES) with violating securities laws in its handling of the Facebook IPO and levied a $10 million fine on the company, the highest ever of such fines against a securities exchange. NASDAQ agreed to settle without admitting or denying any guilt.

The SEC announcement accused the stock exchange of being unprepared for the massive IPO and making poor decisions in the face of technical difficulties that then lead to the violation of securities laws.

At the heart of the issue were limitations within NASDAQ’s system that prevented the matching of buy and sell orders in a timely manner. Then without fully understanding the root of the technical problem it faced, NASDAQ hastily allowed trading in secondary markets, such as the New York Stock Exchange, which caused 30,000 Facebook orders to be trapped for over two hours on the morning of the IPO, when they should have been executed or canceled.

The SEC also accused NASDAQ of using an unauthorized account to take a short position of 3 million shares in Facebook. “NASDAQ subsequently covered that short position for a profit of approximately $10.8 million,” according to SEC’s release.

With Facebook growing ever more in popularity with the world’s social media clientele, it leaves a lot to be desired when it comes to its stock.