Comments on: The Facebook earnings-forecast scandal A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: nathan123 Wed, 23 May 2012 07:41:13 +0000 SteveDiamond is correct that it’s securities fraud if material information was ommitted from the S1. Also, it is illegal for management to selectively disclose to analysts material non-public information. Any guidance someone from Facebook gave to the underwriters’ analysts on Q2 and FY2012 would have been material and should have been made public. Further, it is illegal to trade on material, non-public information, which you could argue is what the underwriters and others did through the greenshoe. One might also find that any trades by the clients who were told might be insider trading. Big fat festering pile this is.

By: SteveDiamond Wed, 23 May 2012 04:00:47 +0000 I think the debate will quickly to move to whether or not Facebook and the underwriters disclosure in the S-1 regarding the mobile revenues was a material misstatement. If it turns out to be true that the company gave the analysts more information than was in the S-1 – enough to cause those analysts to change their models – it would seem to be material. Then we have securities fraud.

By: niveditas Wed, 23 May 2012 02:28:37 +0000 I mean, seriously, do you have any clue what the regulations regarding research actually are?

By: niveditas Wed, 23 May 2012 02:27:22 +0000 Felix, huh what?? the analysts most definitely don’t sit on the same side as the traders. As a matter of fact they’re not supposed to be talking about their research to traders unless chaperoned by legal and compliance, and if they breath a whiff of what the result of their analysis is likely to be, those traders can’t trade the stock any more.

By: RS108 Tue, 22 May 2012 22:25:53 +0000 The FB IPO’s ridiculous valuation was predicated on the naivety of the retail investor and more importantly the informational asymmetry between the ‘smart money’ (institutions) and the ‘dumb money’ (retail). This IPO was based on exploitation of the retail investors.

If retail investors are involved then there ought to be no informational mismatches. All information must be made public.

Separately the practice of banks producing research only for ‘clients’ needs to end. All research needs to be made public. Their research needs to used as marketing for the bank in general and not as a perk for being a client. The Chinese Wall is a farce. It is time that this was re-looked at the information

Access to the analysts can be restricted to bank clients or the analysts can earn their keep by being providing live presentations to clients only. Much like how music stars earn most of their money by providing live concerts. Their music is freely available on the internet.

By: thispaceforsale Tue, 22 May 2012 21:09:51 +0000 As much as it stinks, isn’t this simply one more logical reason why jack shouldn’t be exchanging real goods for magic beans? If all the other logical reasons to stand on the sideline have fallen on deaf ears…

By: MKCurious Tue, 22 May 2012 17:33:46 +0000 I’m sure that “as a former analyst,” Blodget is very familiar with ways that the banks can manipulate the IPO price. There’s a reason he was banned from finance…

This seems like the sort of situation that we can let the market sort out. There will always be information asymmetries during IPOs, and I have a hard time pitying investors who lost money because they took Morgan Stanley’s numbers at face value.

By: MrRFox Tue, 22 May 2012 16:56:47 +0000 Selective dissemination in an IPO setting vs. normal market setting.

Even though it feels wrong even in the normal setting, there is a good argument to be made for allowing early dissemination to those who pay for it, one way or the other. Research isn’t created for free. Disclosures should be made when the information is released, though.

In the IPO setting, it seems different. There is in effect a relationship of sorts between the underwriter and the public, from the prospectus and the situation itself. If there is also inside (for lack of a better term) info floating around between the underwriters and a select few and that fact is not explicitly disclosed to the public, in the prospectus or otherwise, then IMO we’re sort of in ordinary fraudlent concealment territory.

OBTW: the green shoe seems to be a form of call-option for the underwriter, so the short doesn’t actually seem like it’s naked, but is covered by the option, up to the size of the option.

By: FelixSalmon Tue, 22 May 2012 15:52:34 +0000 TinyTim, good question. And for the answer, look to the Chinese Wall between the investment bank and the traders. The analysts sit on the same side of the wall as the traders, and the opposite side of the wall from the investment bank. So while I’m OK with them talking to their traders, I’m not at all OK with all of this chumminess surrounding the investment bankers taking Facebook public.

By: TinyTim1 Tue, 22 May 2012 15:37:14 +0000 The US is way behind Europe on this although both leave the retail investor at a material disadvantage.

In Europe pre-IPO research is published, but quite hard to get hold of. Impossible if you are a retail investor.
In the US you don’t necessarily have to be a whale to get access to the numbers but you have to be a client and have to speak with your sales contact.

As a result it is almost impossible to change your estimates at the 11th hour in Europe so the problem here – and let’s be clear – the problem is SELECTIVE DISSEMINATION – can’t happen in Europe.

However, any investor worth their 2&20 would have at the VERY LEAST made the three phone calls necessary to check whether the NEW IPO PROSPECTUS had caused the analysts to change their numbers.
That’s common sense.
Sure the switched on brokers would have called big clients with the heads-up but again – that is business as usual.

If FB was post-IPO and made a comment about the Q you can be damn sure there would be a note out about it the next day from every analyst – most would call the company for some colour.
The company would talk the analyst numbers down and BOOM: new estimates.

That is business as usual.

However, this is pre-IPO, so what does that change?
It makes access to the estimates harder to get.
But since they are ALREADY hard to get (even post-IPO) then I don’t really see a huge problem.

Felix already raised the whole issue of selective dissemination in the post “Sell-side research isn’t insider information” where you defended banks/analysts “monetizing their assets as best they can”…
So which is it Felix? Either selective dissemination is good or it’s bad. You can’t have it both ways.