What happens when Mark Zuckerberg misleads investors? Facebook starts losing its ‘Face’! The hugely hyped IPO (Initial Public Offer) which people waited for with bated breath has turned into a Pandora’s Box, haunting investors and underwriters and giving analysts an opportunity to investigate, what went wrong?

How is it that what was supposed to be the biggest tech IPO in U.S. history has become so chaotic and now surrounded by lawsuits? A group of Facebook shareholders have filed a case in the New York district court alleging that institutional investors (big banks) were aware of some ‘important information’ about Facebook’s financial position. Information which was not shared with the smaller investors.

Robbins Geller, the law firm that won a $7B settlement for Enron’s shareholders, is co-ordinating a class action lawsuit asserting that Facebook and its bankers misled investors by concealing the true state of affairs of the company.

In early May 2012 when Facebook started it’s dog & pony show for its IPO, the research analysts developed financial forecasts of the company in order to ascertain the marketing and pricing of the IPO. Such forecasts are generally viewed by the ‘blessed sophisticated investors’, which later use these estimates to determine the actual price of the stock. Most importantly (and weirdly), these estimates are not published anywhere. In fact there is no written proof of sharing this sensitive information about a company’s financial affairs with the institutional investors.

So basically what was this ‘important and sensitive information’, which led to such a debacle?

It has been noticed that the increased usage of Facebook on mobile devices as compared to Personal Computers has caused decreased advertisements per page. This might have suggested the institutional investors that Facebook’s business has deteriorated, which may directly affect the revenues of the company. Weak financial position means lower pricing. But to the outside world, this weakness of the finances is not revealed. All this plus a few technical glitches by Nasdaq didn’t really allow Facebook to take off. The investors started keeping a close watch at the company and thinking twice about what is the stock’s real worth. On a side note, there is a second lawsuit regarding the Nasdaq glitches, but that’s for a whole different blog entry!

To conclude, misleading investors can really get you into trouble and the best example of our times is the Facebook IPO. As also the main theme of corporate governance says, it is the accountability and responsibility of the people in the business to ensure shareholders’ welfare.

Rashmi S Gairola

 

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