Mark Zuckerberg, Facebook founder and CEO, and leading investors in the company cashed out millions of shares before the price dropped off, according to company filings.
It was also revealed that a company executive issued a warning days before the Initial Public Offering (IPO) that Facebook’s revenues are lower than expected, information that would have likely dropped the opening price of the stock.
The new reports are already raising questions about whether top investors profited from the IPO at the expense of smaller buyers.
On Wednesday shareholders filed a lawsuit against Facebook and the banks behind the company’s stock, Morgan Stanley and Goldman Sachs.
Additionally, both the Securities and Exchange Commission and the Financial Industry Regulatory Authority have begun looking into the matter.
The US Senate Banking Committee has also launched an inquiry and the state of Massachusetts has subpoenaed Morgan Stanley, demanding answers.
Facebook stock rose 3.3% in trading on Wednesday, rising to $32 a share.
However, a new analysis said the stock could fall to as low as $9.59.
That’s a far cry from the $37.58 that Mark Zuckerberg fetched for 30.2 million shares he unloaded on Friday. The founder of the social networking website made $1.13 billion on the sale.
By the end of trading on Tuesday however the price had dropped to $31 meaning Mark Zuckerberg saved himself a cool $174 million by getting out early.
Mark Zuckerberg, 28, still holds a vast amount of Facebook stock but his decision to sell off so much will leave investors wondering about his confidence in the company.
The drop is based around the realization that Facebook might not be growing as quickly as initially thought. And the company’s second-quarter growth will likely fall short of expectations as fewer new users join the social networking giant.
Shareholders filed a lawsuit on Wednesday, alleging that Mark Zuckerberg, Facebook and the banks that backed the Initial Public Offering, Morgan Stanley and Goldman Sachs, knew this information, but weren’t forthcoming with it.
On Tuesday, Reuters revealed that the banks’ analysts downgraded their estimates about the future earnings of the company while they were rolling out the IPO.
Business Insider called the move “unprecedented”.
Furthermore, the website reported that the banks revealed to privileged major investors that the share price was likely to tank, but left smaller stock buyers in the dark about this information.
The Securities and Exchange commission is investigating these allegations and the state of Massachusetts has filed a subpoena demanding Morgan Stanley release information about the IPO.
Mark Zuckerberg’s plans to sell were revealed in documents filed in advance of the IPO on Friday, but the problems that have happened since cast them in a new light.
Venture capitalist Peter Thiel also announced his plans early too but his return was beyond anything he could have hoped for.
He wrote Mark Zuckerberg a cheque for $500,000 in 2004 but has offloaded 16.8 million shares for the tidy profit of $633 million.
Among the others to cash out was Mark Pincus, the chief executive of online gaming company Zynga.
Eight years ago he gave Facebook a cheque for $40,000 but now has sold $38 million worth of stock.
Venture capitalists Accel Partners, which handed over $12.7 million back in 2005, sold $1.9 billion of stock but retained $5.8 billion.
Whilst the big players were making a fortune however, small investors have seen their attempts to get in on the Facebook bubble fall flat.
As of close of trading on Tuesday shares were a staggering 18 per cent below what they had been at the opening on Friday.
At one point they had slumped 31% from the $45 peak hit shortly after they started trading.
But according to analysts StarMine this could not be the end of it and the slide could carry on until stocks are just $9.59 each.
It has examined estimates from Wall Street experts and concluded that Facebook is currently vastly overpriced, though its forecasts do tend to be gloomier than others.
Eddy Elfenbein, editor at finance website Crossing Wall Street, said: “Facebook right now is going for far more than what it’s worth, it’s like buying $1 for $1.98, it just doesn’t make sense at this price.
“Just from basic modelling the stock should be around $17 to $20, and that is with a lot of variables.
“I would call that an ideal price. I would be interested in buying and I think that is a good deal for investors.”
Among those who did not cash out on Friday when Facebook shares were trading at $38 each was the company’s former president Sean Parker.
His stock is still worth over $2 billion but the price slump meant his fortune decreased by a staggering $300 million.
In a sign of how feeling is changing against Facebook, some commentators have begun comparing its activities to the most reckless behavior of Wall Street banks.
They have also coined the word “Zucked”, which means to get shafted on the sale of Facebook shares.
In a withering article in Time magazine Sam Gustin wrote: “Facebook’s highly-vaunted IPO – which was supposed to be a shining moment for the social network, as well as its lead banker Morgan Stanley and the NASDAQ exchange – has morphed into a debacle that’s reinforced some of the worst stereotypes about Wall Street: that corporate executives and their bankers engineer IPOs to maximize profits at the public’s expense; that Wall Street’s own systems have become too complex for its personnel to handle; and that the entire game is a hype-fueled casino, rigged for the house with a sucker played by the average investor.”
These major sell-offs comes as new allegations are emerging the over-hyped Facebook stock sale may have been rigged against small, every-day buyers.
Two separates lawsuits have been filed against the company and the banks that organized the IPO, Morgan Stanley and Goldman Sachs, alleging the executives knew second-quarter revenue would not meet expectations as Facebook’s growth slows.
Business Insider says this information was shared with the banks by a Facebook insider. As Mark Zuckerberg went on his pre-IPO roadshow, touting his company, the banks downgraded their revenue projections for Facebook.
This information could have reduced the value of Facebook’s initial stock offering. In turn, this could have decreased the amount of money Mark Zuckerberg and his early investors made when they dumped tens of millions of Facebook shares on Friday as trading opened.
However, the banks failed to widely disclose the downgrade, the lawsuits say.
Business Insider says they told only large, institutional investors so they would know to stay away from Facebook stock on the first day of trading.
Facebook denies the allegations in the lawsuit and said it will “vigorously defense itself”.
Morgan Stanley says it followed the same procedure it would for any IPO.
Facebook’s big winners cashed in early before shares price tumbled
Here is a list of the early investors in Facebook who made a bundle by cashing in portions of their stock Friday before share prices tumbled. Value is estimated at $38 a share. Also included is how much money each saved by getting out Friday, before shares sunk to $31.
Shares sold: 30.2 million
Value: $1.13 billion
Saved: $174 million
Accel Partners, venture capital investor
Year invested in Facebook: 2005 for $12.7 million
Shares sold: 49 million
Value: $1.86 billion
Saved: $341 million
Peter Thiel, PayPal co-founder
Year invested in Facebook: 2004 for $500,000
Shares sold: 16.8 million
Value: $640 million
Saved: $119 million
DST Global Ltd, investment firm based in London and founded by Russian oligarch
Year invested in Facebook: 2009 and late 2010 for $200 million
Shares sold: 45.7 million
Value: $1.74 billion
Saved: $323 million
Goldman Sachs, investment bank
Year invested in Facebook: 2011 for $450 million
Shares sold: 28.7 million
Value: $1.09 billion
Saved: $200 million
Elevation Partners, private equity firm with Bono as spokesman
Shares sold: 4.6 million
Value: $176 million
Saved: $3.3 million
Greylock Partners, venture capital investor
Year invested in Facebook: 2006 for $27.5 million
Shares sold: 7.6 million
Value: $289 million
Saved: 53.4 million