Friday, May 25, 2012

The Facebook IPO: Unlike

DonkeyHotey
It has been widely reported that the underwriters for Facebook's initial public offering reduced the revenue forecasts for the company before the IPO, but only shared this information with big, institutional investors. 

As Travis Waldon and Pat Garofalo at ThinkProgress explain, the Facebook IPO fiasco provides us with several examples of how Wall Street games the system:
1. Facebook may have hid information about weak revenue growth: According to one lawsuit launched since the company went public, Facebook “concealed crucial information” regarding weak revenue growth, failing to disclose a revised revenue forecast, much like Wall Street banks failed to provide key information about mortgage securities they were peddling before the financial crisis.

2. Morgan Stanley alerted “preferred” investors to Facebook’s poor growth forecasts: Facebook’s Wall Street underwriters are facing scrutiny from regulators for only alerting certain “preferred” investors about Facebook’s declining revenue stream, leaving many potential shareholders in the dark.

3. Facebook stock dropped, Wall Street got rich: Facebook stock plummeted on its second day of trading and has continued its decline since, but Morgan Stanley and the other underwriters are still turning massive profits by “shorting” its stock. “In fact,” Fortune’s Steven Gandel wrote, “Morgan Stanley and the other banks who were selling Facebook shares to the public were positioned to make more money the lower Facebook’s shares went.” As of Tuesday, the group of Wall Street banks that underwrote the IPO could have topped more than $450 million in profits — on top of more than $170 million in underwriting fees.

4. Facebook will dodge billions in taxes after its IPO: Corporate tax law allows companies that issue stock options to make huge deductions to their tax liabilities, helping Facebook avoid $16 billion in taxes. CEO Mark Zuckerberg could possibly never pay taxes again, using a series of loopholes to avoid them after the initial hit he’ll take after selling shares.

5. Facebook is spending big on politics: Just like the Wall Street banks and other big companies that spend huge amounts of cash lobbying Washington, Facebook jumped into the fray, giving $119,000 in donations to lawmakers through March 31. The money went to leaders of both parties and those lawmakers who “serve on House and Senate committees that handle Internet and online privacy issues.”

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