Question of Fair Play Arise in Facebook’s I.P.O. Process from the NYTimes DealBook discusses how Morgan Stanley, Goldman Sachs, and other banks involved in the Facebook IPO “shared a negative outlook about Facebook with a select group of clients, rather than broadly with all investors.” In the days preceding the IPO the banks’ respective analysts lowered their estimates of Facebook’s growth after the company shared its quarterly and annual revenue projections.
As is typical in the I.P.O. process, research analysts at Morgan Stanley, Goldman Sachs and other firms contacted certain clients to discuss their revised expectations, while other big investors called on the banks to get their new take. But ordinary mom-and-pop investors did not have the same access to the valuable information.
The S.E.C. is investigating the Facebook IPO but what’s described above may not violate any laws: “research analysts are not obligated to share their work with the wider public. The rules governing the I.P.O. process allow analysts to confer with particular clients, as long as it is done in line with a bank’s longstanding policies.” Nevertheless, it shows how the game is rigged in favor of institutional investors, at retail investors’ expense.
I did not intend to post again about the Facebook IPO but Morgan Stanley’s $2.4 Billion Facebook Short persuaded me otherwise for its clear explanation of the Morgan Stanley greenshoe option, which involves shorting the IPO company’s stock. Felix Salmon explains how a greenshoe is supposed to work, the details of the Morgan Stanley Facebook greenshoe, and the circumstances under which the bank can make or lose money on it. Salmon concludes-
[s]o the chances are that at the end of the day, Morgan Stanley is going to end up pretty flat on its trade, selling the shares at $38 and then buying them back at $38. But if it bought more than 63 million shares on Friday, then it is sitting on a substantial mark-to-market loss right now. And similarly, if it bought back fewer than 63 million shares on Friday, then it’s actually making a profit on its greenshoe short.
(Thanks to WSH for sending the article’s link.)
Today’s first five stories from Eric Bedell’s This Web Day:
I don’t closely follow IPO’s, but I cannot remember the market and media turning on an initial public offering so quickly. Kicking the 800-pound billionaire gorilla may be entertaining, but this reaction bodes ill for other tech IPO’s in the pipeline.
Here’s an interesting tidbit from today’s NYTimes Dealbook article As Facebook’s Stock Struggles, Fingers Start Pointing:
Some institutional investors were also surprised by the size of their allocations, expecting to get far fewer shares. In the process of jockeying for I.P.O. shares, investors will typically ask for a large block, even if they expect to only receive a fraction.
“We got more shares than we expected, which spooked us,” said one portfolio manager, who spoke on the condition of anonymity for fear of upsetting Facebook’s underwriters. Concerned that the size of its allocation implied a lack of broad investor support, the manager sold all of the firm’s Facebook’s shares on Friday. “If it was truly a hot, hot deal, we would have gotten less.”
Here’s a link to Greg Smith’s buzz-making NYT Op-Ed, Why I Am Leaving Goldman Sachs. It deserves to be read as an insider’s critique and to establish context for the buzz it is generating. Smith’s criticisms conform with my view of Goldman but I claim no special insights about the frim. From what I’ve come to understand about its culture I know I wouldn’t fit there, but that’s not saying much–I don’t fit the culture of many employers and institutions. It’s difficult to credit a 180-degree cultural shift in just over a decade. I expect the changes Smith relates are not solely Goldman’s. He is not the same person at 33 that he was at 21–who is?–but his Op-Ed presents Goldman as the only variable. But even if one does not take his words as gospel or question the wisdom of tossing them over his shoulder as he walks out the door they have as Judge Grant liked to say, thrown the cat among the pigeons.
The federal court in New York yesterday sentenced billionaire Raj Rajaratnam, founder of Galleon hedge fund, to 11 years in prison for insider trading. The 11-year sentence, while far less than the 24 years and 5 months sought by the prosecution, is the longest ever in an insider trading case in the U.S. This sentence is well-deserved, a sentiment that may appall my criminal-defense attorney son and former colleagues at the Prisoners’ Rights Project, but it is Rajaratnam’s naked dishonesty and greed, his fundamental corruption, that are appalling. Arguing for a lesser sentence one of his lawyers cited Rajaratnam’s charitable work, saying “Raj Rajaratnam has attempted to make the world a better place. If there is a ledger in one’s life, he should have some credit to draw upon in that ledger now that things have gone bad.”
Now that things have gone bad? This is not an appropriate situation to use the passive voice. Things did not go bad, like a bottle of milk left too long in the hot sun. Rajaratnam had education and wealth and affirmatively chose to be a criminal. He earned the shame and crushed reputation that are now his legacy.
Yesterday the Ninth Circuit Court of Appeals issued its decision in Tyler and Cameron Winklevoss’s lawsuit, dismissing their attempt to void their settlement agreement with Facebook. The twins claim Mark Zuckerberg stole their ideas for the website that became Facebook, and sued. The history of the litigation is somewhat tangled (the 9th Circuit briefly summarizes it in the first few paragraphs of its opinion) but it comes down to the parties’ agreement to settle the suit by Facebook paying the twins $20 million in cash and giving them shares of Facebook stock–now worth about $200 million. Some time later the twins sued again to overturn the settlement agreement, claiming Facebook concealed material information about the stock’s value. The trial court rejected their claim and they appealed to the 9th Circuit, which was not swayed by their arguments. After rejecting each in turn the court offered this summary:
The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity. See Geoffrey A. Fowler & Liz Rappaport, Facebook Deal Raises $1 Billion, Wall St. J., Jan. 22, 2011,at B4 (reporting that investors valued Facebook at $50 billion—.33 times the value the Winklevosses claim they thought Facebook’s shares were worth at the mediation). For whatever reason, they now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached.
The New York Times reports that the Twins will seek en banc review of the decision.
The Journal’s article about the suit links to a great flash graphic titled “The Making of a Mortgage CDO.”