5 Ways The Facebook IPO Teaches Us About How Wall Street Games The System


Written by Travis Waldron and Pat Garofalo

Facebook’s initial public offering — which so dominated the financial press that Facebook has been on the cover of the Wall Street Journal for nine straight days — has started to raise some red flags for regulators, after it came to light the company and its Wall Street underwriters quietly hid a report about weak revenue. And that’s just one of several ways in which the Facebook IPO highlights how Wall Street and big companies can game the rules to gain an economic advantage. Here are five examples:

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.”

As Reuters’ Felix Salmon simply put it, “Facebook was whispering in the ears of the lead managers of its investment banks, on the understanding that the results of those whispers would remain available only to select clients until after the IPO was over. That’s not cool.” But at the moment, it’s how big businesses and Wall Street banks operate.

This post was originally published by ThinkProgress.


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Photo from Thinkstock


Chiensheng T.
Chien-sheng T4 years ago

The IPO transaction should be undone (reversed) as a "fraudulant conveyance" and all the moneys distributed should be reverted. Then the Investment Banks and FB should eat the fees. That is the only way to make it fair, and preclude such abuse from ever occurring again, and it would restore faith and health to the system, and fair play and level playing field. I believe there is a law regarding 'fraudulant conveyance" that can be applied. A "fraudulant conveyance" is a transaction that is conceived to delude--a planned fraud. And that is what this FB IPO is--a sham on the public.

Fadi M.
Fadi M4 years ago

What's new? Same old Zionism!

Manipulation, exploitation, illusory superiority, killings, wars, injustice, barbarism, misleading, lying, stealing, profiteering, blackmailing, etc.

Go back to Facebook's birthday; we all know Mark Sucker-berg was not the real father!

Katie K.
Katie K4 years ago

Geeeez...what a big shocker. This is the problem and sad. Money makes people think they're better than everybody. Not better but luckier.

Carole H.
Carole H4 years ago

I think the rot started in the 80's with Reagan and Thatcher, the rot being this general acceptance now of 'profit at any cost' without censure or ethics or any sense or semblance of honour or fair play - greed became acceptable and now appears to be the norm, and will only cease when censured by governmental restrictions and safeguards. It is time for the people to stand up and demand political representation by honourable people - I believe such people still exist but many are afraid to stand for office given the murky depths some candidates and their parties will resort to, to discredit or deflame them. We must be braver.

Katie K.
Katie K4 years ago

Geeeez...what a big shocker. This is the problem and sad. Money makes people think they're better than everybody. Not better but luckier.

Chiensheng T.
Chien-sheng T4 years ago

Setting up the system and gaming the system that is what it has become. Facebook and the investment bankers are all in it together. On its own, FB is nothing, just a yearbook sharing system, but the hype, and hyping it all the way to an IPO, based on greed and greater fool theory.

This is what Romney does too. It is the 1% ripping off the 99%, and FB, Goldman Sachs et al, and Romney and all the other "financiers" are doing the same thing. The only people who lose are the hardworking middle class people, trying to make a living. The blessing is that not too many small investors lost on the FB IPO, since they did not show as anticipated, and as FB and its investment bankers planned, expected and desired, otherwise, it would have been a slaughter.

Ken S.
Ken S.4 years ago

At the moment! Let's hope so. Wall Street is, in effect, promoting economic anarchy, leading to an uncompetitive economy, and chaos.

Robert Ludwig
Robert Ludwig4 years ago

Click "Like" if you think it's fraud and they should go to jail.

Carole L.
Carole L4 years ago

Kim S
“I don't believe it's always been this way”

It hasn’t. there used to be stricter regulations Glass-Steagall Act. This was the law that stopped investment banks from gambling away people's life savings for decades -- until Wall Street successfully lobbied to have it repealed in 1999."

And now Warren is calling on Congress to put Wall Street reform back on the agenda and to begin by passing a new Glass-Steagall Act. Of course the big babies are throwing tantrums over being told to play nice.

“Corporations are not people, my friends. :D

Beverly T.
“Why isn't Financing/Budgeting a mandatory subject in schools ????
Oh wait....they can't do that.
Just like the elimination of mandatory Civics Classes.....
It would ruin the PonziMonopoly Scheme.
Duh !!!!”

*Romney voice* Yes, and while we’re at it, let’s increase class sizes, you know, pack em in like Sardines. Yeah! It’ll cut down on the schools heating bill during the winter months.

And we bailed these Mothra fudgers out!?! ENOUGH IS ENOUGH!!!

So, do you Fright Reich “still wonder” what the OWS movement is all about… hello.

Robert Ludwig
Robert Ludwig4 years ago

Plus ça change, plus c'est la même chose.