Bonfire of the Vanities 2012

The Tom Wolfe novel from the 1980s that’s the title of this post – along with the movie of the same name – comes to my mind when reading media reports and online commentary and punditry this morning about the Facebook initial public offering last week and its immediate (current) aftermath.

Many if not all of the novel’s ingredients of ambition, racism, social class, politics, and greed in 1980s New York City are playing out in what already looks like a 2012 update to the 1980s story.

At last night’s NASDAQ close, Facebook’s share price was $31 precisely, a fall of nearly 9 percent on the previous day’s close.

But look at the share price performance since the IPO on Friday – at last night’s close, a decline of over 26 percent.

So what’s happening with the stock of the biggest (and most hyped) tech IPO in history?

Facebook launched its IPO on the NASDAQ stock exchange in New York on May 18, 2012. The launch share price was $38. It’s been up and down like a yoyo ever since, but overall on a downward price trend.

There have been murmurings all week in the financial mainstream media and expert-opinion blogs about behind-the-scenes skulduggery and manipulation. Yesterday, some serious allegations began surfacing into the mainstream.

The Los Angeles Times reported that US financial market regulators are wondering whether Wall Street insiders heard data the public did not before stock trading began:

[…] Morgan Stanley, which led the Wall Street effort to bring the social network public, came under fire following reports that the bank had told some favored clients that the bank was cutting its revenue estimates for Facebook. The lowered expectations came after the tech giant expressed caution in a public filing about its advertising sales on mobile devices.

The legal issue raised could be “securities fraud – plain and simple,” said Ernest Badway, a securities lawyer in New York and New Jersey and a former enforcement attorney at the U.S. Securities and Exchange Commission. “You can’t be putting out two sets of numbers.”

This would be selective disclosure at least – an illegal act under US securities laws.

Headlining its report as an exclusive, Business Insider said it loud and clear:

[…] The analysts cut their estimates because a Facebook executive who knew the business was weak told them to.

Put differently, the company basically pre-announced that its second quarter would fall short of analysts’ estimates. But it only told the underwriter analysts about this.

The information about the estimate cut was then verbally conveyed to sophisticated institutional investors who were considering buying Facebook stock, but not to smaller investors.

Yep, selective disclosure. The Wall Street Journal says similar things. And most papers talk about lawsuits beginning to fly already from unhappy investors.

If all of this proves to be true on investigation, Facebook executives, individuals in Morgan Stanley and others could be facing criminal charges. Right now, it raises questions regarding the capability of those leading Facebook – including founder Mark Zuckerberg – as to their competence, never might matters of trust and integrity.

So what are Facebook, etc, saying about all of this? Nothing at the moment, according to the Business Insider report:

[…] Given the PR and legal disaster that the Facebook IPO is rapidly becoming, most official communications channels have gone silent. Facebook declined to comment. Morgan Stanley did not return a call and email seeking comment.

As students of crisis communication well know, if you say nothing, there’s a vacuum. And they know that there will be plenty of other voices to fill that vacuum on your behalf. The conversation continues whether you’re there or not.

How serious all of this really is for Facebook, no doubt we’ll know more by the end of this week. That’s less than three days away. Actually, I wonder whether Facebook has three days to get a grip on this.

And what of the Facebook small investor, the average-Joe punter? Well, you could probably do no worse than the advice suggested in this JoyofTech cartoon.

Happy investing.

PS: Worth reading Tom Wolfe’s novel if you haven’t, or re-reading it if you have. “What goes around, comes around” also springs to mind. And of course, we’re nowhere near the story’s conclusion yet.

[Later:] Prompted by a tweet by Paul Sutton, this 60-second TV commercial from financial services firm Allied Dunbar in 1995 has ironic relevance to this story:

(If you don’t see the video embedded above, watch it at YouTube.)

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Neville Hobson

Social Strategist, Communicator, Writer, and Podcaster with a curiosity for tech and how people use it. Believer in an Internet for everyone. Early adopter (and leaver) and experimenter with social media. Occasional test pilot of shiny new objects. Avid tea drinker.

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