Morgan Stanley, Goldman Sachs Sued Over Facebook IPO | Hacker News Reader

Morgan Stanley, Goldman Sachs Sued Over Facebook IPO

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100 pointsdmm32 comments

Here's the facts: the information upon which analysts reduced their estimates was publicly available. There was no secret, insider information. It was based on FB filings with the SEC. Failing to research a stock before investing is just dumb to the point where plaintiff's really should, by natural consequence, lose.

If losses are always recoverable via lawsuit or government bailout, all we do is perpetuate such gambling.

Taking no responsibility for oneself and having a deep-rooted need to find someone to blame is becoming the great American way. Depressing.

Not stating an opinion either way, but describing what the lawsuit is actually about here. Morgan Stanley's analyst, Scott Devitt, adjusted their estimates and they then gave that information to high-end MS customers, but not to the public. The question is whether or not MS has a responsibility as an underwriter to disclose that information to an audience broader than its own clients as material information about the company, or if they had any additional material information about the company that led them to cut that estimate.

More: http://dealbreaker.com/2012/05/even-the-underwriters-were-si...

"The question is whether or not MS has a responsibility as an underwriter to disclose that information to an audience broader than its own clients"

That is an interesting question and will be a good suit to watch. If the finding is that there was a responsibility to broadly disseminate such information, it will also be interesting to see what the impact is to the financial advisory industry.

What concerns me more than public dissemination of analysis would be the instance of them only disseminating negative information to a select group of their own clients, while leaving their other mom and pop clients in the dark.

That would seem to be a clear violation of fiduciary duty, and if it turns out that's what they did, I hope they get the book thrown at them.

They don't, there are chinese walls in between the analysis and trading groups. Research is a product most banks sell, if you don't purchase it, you don't get it.

There are supposed to be Chinese walls. If you read the article about Ted Parmigiani in last Sunday's New York Times, it seems the walls can be like the one in A Midsummer Night's dream. http://www.nytimes.com/2012/05/20/business/is-insider-tradin...

While your last two paragraphs are true, it's not clear they apply to this case. What is clear is that some folks have some very wishful thinking with regard to Facebook, the company. Ask yourself why.

No matter what you may think of FB, it is going to come down to the actions of the FB execs. If they knowingly tried to mislead common investors, then common investors are certainly not to blame.

Meanwhile, the FB stock is becoming a pariah.

So even if they have some valid reason for changing their estimates days before the IPO, and they can explain why the insiders were the only ones who seemed to get the message, it may be a moot point. Because they have spooked investors.

And it's a stretch to try to blame investors for being spooked.

The victim here is actually FB.

The end of FB, and its replacement with a private and optimised means of sharing that _you_ control, is the beginning of a better web.

It may not be Diaspora. There is still lots of time for this to play out.

Just to expand, the Guardian mentions this as well.

In essence, the lawsuit revolves around MS and GS passing bad news round internally without publicly broadcasting it publicly - a form of insider trading.

The SEC is also investigating regarding this and similar matters.

>In essence, the lawsuit revolves around MS and GS passing bad news round internally without publicly broadcasting it publicly - a form of insider trading.

This is silly. The bad news for Facebook was public, before the IPO. "Did not do the research" is not a defense.

http://bits.blogs.nytimes.com/2012/05/09/facebook-amends-its...

http://www.cnbc.com/id/47147457

I think that the suit against NASDAQ has some merit, especially considering all the stories about traders getting the incorrect number of shares.

Further, I don't even think it would have been legal for the analyst to publish their findings - if I'm not mistaken, MS and GS need to wait until IPO + 40 days before publishing anything about FB besides the IPO prospectus.

No, that's wrong. The banks weren't passing those two links around, nor the facts they were based on. They were passing their own analysis, privately, to a select set of customers.

Whether that constitutes "insider trading" depends on whether or not that analysis was done based on or augmented by internal information related to their underwriting of the IPO. That's a question we can't answer, thus the lawsuit.

This whole Facebook IPO has got to be the worst I have ever seen traders whine and the market be irrational. 90+ P/E is okay, but new projections scare you?? Really?? They are projections!! I project I will make 10 billion dollars next year, buy stock in me!

This IPO was perfect from Facebook and intial investors perspective, it shows they priced the IPO to extract maximum value (they didn't lose any value to market traders via a "healthy POP").

Traders obviously placed the wrong bet, boo hoo, suck it up. You can't win on every trade. You think they'd know that by now.

This whole "I bought a sure thing that wasn't and someone else must pick up the tab" mentality is crap and must be stopped. I hope they lose this suit, or at the very most get pennies on the dollar.

If you get involved in a venture involving GS and you're surprised you got screwed then you haven't paid much attention to the current events of the last 5 years.

Call me skeptical but I have a hard time believing that people of their calibre failed to notice that facebook's growth projections were massively overstated.

I wouldn't be surprised if this was the intention all along. They knew the projections were massively optimistic and knew they'd have a watertight case (this is pure skeptical speculation) when the inevitable happened.

"Call me skeptical but I have a hard time believing that people of their calibre failed to notice that facebook's growth projections were massively overstated."

Happens pretty much all the time. That's the essence of the Greater Fool strategy: there's always someone with deep pockets who's willing to take a bad bet. Even ostensibly sophisticated investors and institutions are willing to part ways with their better senses when sufficiently excited about something.

"I wouldn't be surprised if this was the intention all along."

I think that's an overly paranoid viewpoint. It seems far more likely that a bunch of people got suckered in the IPO roadshow than a bunch of people willingly allowed themselves to get suckered in the vague hope of making it all back in a class action. Judgments in class actions are anything but certain, are often drawn out for years, and almost certainly wouldn't make up the loss on the stock.

It seems far more likely that a bunch of people got suckered in the IPO roadshow

Surely risk analysts are paid silly money to ignore that sort of hype and concentrate purely on the facts right?

In theory, yes. In practice, well, we all know how this story often goes. :)

Hanlon's Razor.

Never attribute to malice that which is adequately explained by stupidity.

I don't understand this. Selective dissemination of actual business data - fine, sue their asses. But projections are guesses - guesses without any guarantees. Facebook could magically rake in a billion tomorrow, or completely shut down - "projections" aside.

Why is it that there's a legal recourse because the projections person X got were different from what person Y got?

Because the stock price people are asked to pay at an IPO (or at any time) is based primarily on projections.

So, 'Mom and Pop' got projections A which made $38 sound like a reasonable price, whereas the big boys got projections B which told them to wait till the price settles on $10.

'Mom and Pop' got projections A which made $38 sound like a reasonable price

That's only half true. $38 never really looked like a reasonable price.

1) A big reason why Facebook was not excited to IPO.

2) Facebook probably doesn't care that much since it got its money at very rich valuation and now can just go about its business (ideally the lawyers will handle all this with minimal distraction to the company).

Do lawsuits like this happen often for IPOs? Or is this something unusual?

I think lawsuits happen anytime there is big money to be made. Goldman, Morgan Stanley, and Facebook have hundreds of billions of dollars. They can settle for tens or hundreds of millions of dollars without batting an eye. That pays off for the lawyers and potentially the claimants in a life changing way.

I work in this business. Lawsuits against big banks do happen all the time for stuff like this, you are right about that. But "They can settle for tens or hundreds of millions of dollars without batting an eye." is absolutely not true.

These big banks are very aware of their legal exposure and do a lot to minimize it. A bank (even a big one) would not authorize a legal reserve in the 10s of millions without lots of people very high up in management being involved. Big reserves like this are routine, but significant.

I doubt this occurs in most IPO's which see a decent pop in the price. There tends to be many fewer lawsuits when everyone involved is raking in the dough.

Thinking about this for a moment, what conceivable reason could someone have to sue with billions of dollars on the line?

You do the math.

Or search through some IPO history.

So these people bought it at $38 or whatever. And now they've lost money because "the true facts" came out. When exactly did that happen? What's the timeline here?

As far as I know, it's this:

Facebook's IPO roadshow started around May 7th. This was basically Zuckerberg and the underwriters going around and selling stock to investors.

On May 9th, Facebook released an updated S-1 filing to the SEC. This was made public at the time. It's here:

http://www.sec.gov/Archives/edgar/data/1326801/0001193125122...

Immediately after that, the underwriters(Morgan Stanley, Goldmans, and Merrill Lynch) updated their growth estimates downward to reflect the fact that Facebook made less money in Q1 2012 than in Q1 2011. They notified a subset of their paying clients about this. That's where part of the issue is. SEC rules also bar underwriters from making public statements about IPO's that they're involved in, which is probably the primary reason that the analysis was not made public.

EDIT: More context.

> updated their growth estimates downward to reflect the fact that Facebook made less money in Q1 2012 than in Q1 2011

Was that only an estimate on their own personal analysis? Or did they divulge any additional internal numbers that wasn't made public before?

This is extremely shady behaviour by these institutions. I would love to see them get severely disciplined about this by having to make good investor losses but cannot see them getting more than a smacked hand.

I always thought Facebook was overvalued at something like a PE ration of 70+ at issue but this is no excuse for the way these companies released the analyst information.

And so begins the butthurt.

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