Why I Prefer Mutual Funds

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.

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