Facebook's founder, Mark Zuckerberg, has gone from hero to zero as the stockmarket flotation of the decade flounders amid lawsuits and accusations of greed, hype and deception.
The law firm that won a $7bn settlement for Enron's shareholders is pursuing Zuckerberg, his board and the long list of banks advising the company for making "untrue statements" about its financial performance.
Robbins Geller is bringing the second class action law suit in as many days against Morgan Stanley, Goldman Sachs, Barclays and a host of Silicon Valley luminaries including PayPal guru Peter Thiel. A separate suit filed in California on Tuesday by investor Darryl Lazar claims that the social network's share prospectus contained "materially false and misleading statements".
The regulators are also closing in. Mary Schapiro, chair of America's main financial watchdog, the Securities and Exchange Commission, said: "I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook."
After months of hype about the float of the social networking site, which has nearly a billion users across the globe, the appetite for its shares has collapsed since its launch at $38 per share on Friday. The shares are now trading at $31.78, leaving the company that boasts a user base including half the American population is worth £4bn less than it was six days ago, and earning it a new moniker: Fadebook.
So while the social network's bankers and its wealthy early investors have profited handsomely from the float, the legal profession is set to cash in.
Both lawsuits claim that certain investors had access to information that would have dented confidence in the shares, while others were left in the dark.
The problems began on 9 May, when Facebook amended its initial public offering (IPO) prospectus with a short and, for some, hard-to-interpret reference to the fact that while its usage on mobile phones was growing exponentially, the company was finding it harder to sell advertising on its mobile website than on "desktop" pages.
Analysts promptly began revising their forecasts. Those included Scott Devitt, who covers consumer internet firms for Morgan Stanley. The bank, as lead underwriter for the IPO, was employed as Facebook's cheerleader-in-chief.
According to Reuters – Morgan Stanley has not yet made the date or the content of the forecasts available to the public – Devitt decided that revenues in the second quarter of this year, which runs until the end of June, would be $1.111bn (£705m), down from an earlier estimate of $1.175bn. He shaved full-year forecasts too, from $5bn to $4.85bn. JP Morgan and Goldman Sachs, the second and third lead underwriters, also downgraded their estimates.
Participating banks cannot publicly issue research or make recommendations until 40 days after an IPO is priced, but their analysts are allowed to communicate estimates orally to customers. The concern is that this information may have filtered through only to a privileged few rather than the wider public.
In a statement, Morgan Stanley said a "significant number" of analysts in the IPO syndicate reduced their estimates after Facebook's disclosure on 9 May, adding: "Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations."
The actions of Facebook's underwriters in the days that followed gave no hint of the information they were receiving from their own number-crunchers.
On Tuesday, 15 May, the range at which they estimated the float would be priced was raised from $28–$35 to $34–$38. A day later, the insiders and early investors who had invested in Facebook during private funding rounds increased the number of shares they planned to sell during the IPO by a massive 25%.
Those most likely to have heard the analysts' downgrades may have decided that the shares would not enjoy the widely expected day-one surge, seen when Google and the professional networking site LinkedIn went public. Basically, for those in the know, at $38 a share, Facebook was a "sell".
Smaller retail investors appear to have paid the price. Only 10% to 15% of shares were thought likely to go to small shareholders. Estimates suggest that the bulk of the 84m extra shares released last Wednesday went to investors at the bottom of the tree.
Chad Brand, founder of the investment adviser Peridot Capital, had put in orders at E*Trade, one of the underwriters. Brand wrote on his blog: "I did not really think they would allocate us any shares ... What happened? We got every share we asked for."
Some of the retail clients who called him that day were getting up to 20,000 shares. Jacob Salzmann, named as a plaintiff in the case being brought by Robbins Geller, spent $124,000 buying shares at $41.766 a piece. By close of play on Tuesday, they were worth just $31.
David Joy, an analyst at wealth adviser Ameriprise Financial, wrote in a note to clients: "These developments reinforce the notion that the underwriters did a wonderful job of pricing the offering in order to maximise the profitability to the company's insiders and its private investors but [they] left very little on the table for public investors in the secondary market."
