Three of Wall Street biggest and best-known financial institutions handled the Facebook IPO, so why were people immediately suspicious when the stock soared and then promptly tanked? Easy answer: Because three of Wall Street biggest and best-known financial institutions handled the Facebook IPO.
Each of them -- Morgan Stanley, Goldman Sachs and JPMorgan Chase -- has a history of exactly the kinds of unethical and/or illegal behavior that might, just might, explain what happened with Facebook.
Mark Gongloff offers a good overview of Mr. Zuckerberg's Wild Ride, in which a stock that was offered at an IPO price of $38 soared to $45 and then plunged to its current (as of this writing) price of $31. A lot of people lost money -- which means a lot of people made money, too.
Zuckerberg promptly sold his 30.2 million shares, netting a quick billion dollars and change. That tells you what he thinks of this investment.
Here are ten reasons why it makes sense to be suspicious of the Facebook IPO, starting with the fact that any overview of the three institutions which handled it might best be described as "rounding up the usual suspects":
1. Morgan Stanley has a history -- and a culture -- of tricking their own clients into making lousy investments.
It was Morgan Stanley's brokers who, in one notorious account, loved to brag, "I ripped his face off!" after convincing one of the firm's own clients to buy a stock that the firm knew was lousy. (See Frank Portnoy's account in Fiasco.)
CNBC reports that "Morgan Stanley may have spent billions of dollars to support the (Facebook) stock price by buying shares in the market." This kind of market manipulation is common. They do these things to create an artificial sense of momentum when the market is turning against an offering. Investors don't know they're doing it at the time, of course. In this case, Morgan Stanley could have spend a billion dollars or more manipulating the stock price.
Now Morgan Stanley's being investigated by the SEC and the Commonwealth of Massachusetts, after reports indicated that its analysts were withholding crucial (and negative) information about the stock offering and at the same time sharing it with their own favored clients. That's a no-no.
2. JPMorgan Chase has a long rap sheet. What's another bust?
JPMorgan Chase is currently in the public time-out box for its botched derivatives trades in London -- about which which it appears to have deceived its own investors (when it failed to tell anyone that the new, improved "risk model" it rolled out was not being used to analyze this London unit.)
When CEO Jamie Dimon said that laws may have been violated in that case, was he expecting people to be surprised? JPM has a long history as a corporate lawbreaker during Dimon's tenure. It paid millions to settle a long list of violations that includes illegally cheating veterans coming home from Iraq -- or still risking their lives there. It gave up nearly three quarters of a billion dollars to settle charges of bribing public officials in Jefferson County, Alabama. (Jefferson County is bankrupt. JPM's executives are doing just fine.)
And JPMorgan Chase just gave up billions more to settle charges stemming from its rampant foreclosure fraud, which involve mass perjury and forgery conducted by a group of inexperienced youngsters that JPM employees called "the Burger King kids."
The JPM rap sheet's got a lot more offenses on it, but that should give you the general idea. Dimon loves to affect an air of respectability. But his outfit ain't the PTA, if you catch my drift.
3. Goldman Sachs is ... well, it's Goldman Sachs.
In one of its many notorious deals, ABACUS, Goldman Sachs lied to prospective investors about mortgage-backed securities. While it was telling investors that these securities were well-chosen and reliable, it was hiding the fact that they were actually being selected by an investor who was famous for betting against them.
Goldman recently settled a $22 million lawsuit for illegally sharing confidential information with its preferred clients, which is a form of insider trading, using internal meetings called "huddles."
That's a lot like the conduct that's being investigated at Morgan Stanley, and the questions it raises is the same one: Was this IPO designed to fail? Barring that, did insiders only tell a few favorites once they knew it would fail, so that they could all get rich betting against the suckers who didn't know any better?
Who's huddling who in the Facebook deal?
4. Goldman Sachs already tried to evade the law for Facebook once before.
If at first you don't succeed ...
At the time we asked, "Which Is More 'Gangsta,' (rapper) 50 Cent's Twitter Stock Pitch or Goldman's Facebook Deal?" We stand by our original conclusion: Sorry, Fitty.
Lloyd Blankfein's entourage tried to avoid SEC regulations that say a privately held company can't have more than 500 investors by defining many thousands of unrelated investors as a single group. They demanded a minimum $2 million investment -- there ain't no sucker like a rich sucker -- and pitched the deal in language that would embarrass a Nigerian email scammer:
"When you have a chance I wanted to find a time to discuss a highly confidential and time sensitive investment opportunity ... If you agree not to use information that we reveal to you ... I will be able to disclose the name of the company and provide you with more information..."
They should've started the pitch letter with the words "Dearest Beloved, My late husband the oil minister ..." As Nomi Prins noted at the time, the plan was to artificially inflate the value of these illegally-traded shares and then "pawn off the overpriced goods on the clients."
They tried to run that little number back in 2010 but failed. Did they finally succeed this time?
5. There's no such thing as a free market.
Thanks to deregulation, our "free markets" ain't free -- in fact, they're less free than at any time in modern history.
Nevertheless the anti-regulatory crowd insists on describing what we have today as a "free market," instead of what it really is: a financial funhouse where investors don't know until it's too late which pop-up vampire is a cardboard cutout and which one's really going suck their blood. "Ripped his face off" indeed.
That's not market economics, it's a horror show.
6. Facebook's a shaky investment anyway.
Think about it: With all the money they have at their disposal, Zuckerberg and his team still can't design a user interface that doesn't frustrate, aggravate and infuriate millions of people every day. Sure, people use it -- because everybody else does. But that was true of MySpace, too, until something better came along. Facebook has a mind-boggling number of users, and they spend an equally mind-boggling amount of time on it every day. But even Mafia Wars come to an end sometime.
What's more, the stock they're peddling isn't much to write home about. Their voting rights are highly diluted, so that the stock owned by Zuckerberg and other preferred holders has ten times as much voting power as everybody else's. Zuckerberg owns 18 percent of Facebook's shares, but has absolute control of the company with 57 percent of the votes.
When something's as overhyped as Facebook stock, it's caveat emptor time. You're throwing yourself at Zuckerberg's mercy, hoping he does better with the company than he has designing Facebook's account management features. (Tried changing your privacy levels lately?)
But if he mismanages your money, you'll just have to bend over and get poked.
7. Mark Zuckerberg doesn't give a rat's you-know-what about investors or IPOs.
"A million dollars isn't cool," says Justin Timberlake as Sean Parker in that movie about Zuckerberg and Facebook. "A billion dollars is cool." It was a cool week for Zuckerberg, who just made another billion, but he doesn't think much of investors. Stephen Gandel lays out all the ways it shows, starting with the fact that Zuckerberg didn't want to take the company public and keeps reminding everybody about it. SEC rules -- the same rules Goldman tried to evade last year -- forced him into it.
Zuckerberg also kept blowing off investors at scheduled meetings. Frankly, that's a refreshing change from all the CEOs I've known who kowtow to them (and often game the numbers to impress them). But it doesn't exactly strengthen one's confidence that this offering was designed with the best interests of investors in mind.
And while CNN's Gandel concludes that Zuckerberg doesn't care about making more money, I'm not so sure. He's sure made a lot in the last few days. For its part, Goldman's already shown that it's willing to trade on insider information to help high-value clients -- clients like Meg Whitman. They called it "spinning," and it involved rewarding executives who gave them a lot of corporate business (which uses their investors' money, not their own) shares in IPOs they're underwriting.
Whitman was forced to resign from its board and Goldman paid a multimillion-dollar fine after the story became public. If they'd "spin" for a piece of eBay's investment action, what motions would they go through for Facebook's?
8. These three players have a huge collective presence on NASDAQ.
Morgan Stanley and Goldman Sachs are almost always in the top ten in reported trade volume on NASDAQ, where Facebook was offered. And JPMorgan Chase provides financial backing to many of these deals. Together they represent a huge chunk of NASDAQ (and New York Stock Exchange) transactions. They control a lot of the trading flow and they're sitting on a lot of data.
That means they can manipulate the market in all sorts of ways. And they can leverage other people's money and make it work ... for them.
So while we're at it, remind me again: Why do we allow so few companies to dominate our financial market? It's called an "oligopoly," and it's bad. It's especially bad when they become too big to fail and can pretty much do whatever they want, knowing we'll rescue them again if -- make that when -- they screw up again.
9. There was a lot of automated trading of Facebook shares.
The roller-coaster ride for Facebook's stock also appears to involve very high volumes of electronic robo-trading, which always raises suspicions. That could just be a sign that the computer programs which now dominate our stock market (and which cry out for a financial transactions tax) didn't like the transaction. If so, they're smarter than most humans.
Or it could mean that these three firms, which together play a dominant role on Nasdaq, pulled a fast one of some kind. Somebody needs to analyze those 'flash' trades and find out.
10. Because they can.
Hey, these three underwriters can do whatever they want -- and they know it.
Until some bankers get indicted -- which doesn't seem likely anytime soon, given the glacial pace of the Administration's much-hyped (but now apparently forgotten) mortgage fraud task force -- they can break any law or rule they want to break. What's the worst that could happen to them? If they get caught they'll negotiation another gigantic fine and let the shareholders (including working people's pension funds and 401ks) pick up the tab while they collect their bonuses and head off to the Hamptons.
So, until the Administration shows us some Wall Street indictments, the usual suspects will keep committing the usual offenses over and over. The Justice Department needs to get serious about investigating Wall Street fraud. And more states should join Massachusetts in investigating this deal.
This one goes to 11 ...
Do we know that's what happened with the Facebook IPO? No -- and we won't know without a proper investigation. But we do know that the Facebook plunge reflects a classic scenario for shady traders who make money hyping a stock while secretly betting against it.
And we know that all three of these institutions are perfectly capable of doing it. They have the means, they have the motive and -- until our government does something about it -- they have the opportunity.
So get on with it, Washington. You better update your status on those fraud investigations before it's too late.