Mark Zuckerberg, Facebook’s founder and CEO, and leading investors in the company cashed in millions of shares before the price fell, according to the company.
It was also revealed that the company’s CEO had warned days before the initial public offering (IPO) that Facebook’s earnings were lower than expected, information that would likely drop the share opening price.
New reports are already raising questions about whether top investors have benefited from an IPO at the expense of smaller buyers.
On Wednesday, shareholders filed a lawsuit against Facebook and the banks behind shares of Morgan Stanley and Goldman Sachs.
In addition, both the Securities and Exchange Commission and the Financial Industry Regulatory Authority have begun to address the issue.
The U.S. Senate Banking Committee has also launched an investigation, and the state of Massachusetts has called on Morgan Stanley to respond.
Shares of Facebook rose 3.3% in trading on Wednesday, rising to $ 32 per share.
However, a new analysis indicates that shares could fall to $ 9.59.
That’s far from the $ 37.58 Mark Zuckerberg received for the 30.2 million shares he unloaded on Friday. The founder of the social networking website made $ 1.13 billion from the sale.
By the end of trading on Tuesday, however, the price dropped to 31 dollars, which means that Mark Zuckerberg saved a great 174 million dollars by coming out early.
Mark Zuckerberg, 28, still owns a huge amount of shares on Facebook, but his decision to sell so many will leave investors wondering about his confidence in the company.
The decline is based on the realization that Facebook may not be growing as fast as originally thought. And the company’s growth for the second quarter is likely to fall short of expectations as fewer new users join the social networking giant.
Shareholders filed a lawsuit Wednesday, claiming Mark Zuckerberg, Facebook and the banks that backed the initial public offering, Morgan Stanley and Goldman Sachs, knew the information but were not sent with it.
On Tuesday, revealed that bank analysts had lowered their estimates of the company’s future profits as they launched an IPO.
Business Insider called the move “unprecedented.”
The website also said that banks are disclosing to privileged large investors that the stock price is likely to collapse, but leaving smaller stock buyers in the dark about this information.
The Securities and Exchange Commission is investigating the allegations, and the state of Massachusetts has filed a subpoena asking Morgan Stanley to release information about the IPO.
Mark Zuckerberg’s plans to sell were revealed in documents filed before the IPO on Friday, but the problems that have occurred since then have shed new light on them.
Venture capitalist Peter Teale also announced his plans early, but his return exceeded all he could have hoped for.
He wrote Mark Zuckerberg a check for $ 500,000 in 2004, but landed 16.8 million shares for a net profit of $ 633 million.
Among the others who made money was Mark Pincus, CEO of online gaming company Zynga.
Eight years ago, he gave Facebook a check for $ 40,000, but now he has sold shares worth $ 38 million.
Venture capitalists Accel Partners, which surrendered $ 12.7 million in 2005, sold $ 1.9 billion worth of shares but kept $ 5.8 billion.
While the big players were gaining fortunes, the small investors saw their attempts to enter the Facebook bubble fall.
Towards the end of trading on Tuesday, the shares were a staggering 18% below what they were at the opening on Friday.
At one point, they fell 31% from the $ 45 peak shortly after they started trading.
But according to StarMine analysts, this may not be the end, and the slide may continue as long as stocks are only $ 9.59 each.
He studied the forecasts of experts from Wall Street and came to the conclusion that Facebook is currently significantly overestimated, although its forecasts tend to be gloomier than others.
Eddy Elfenbein, editor of the financial website Crossing Wall Street, said: “Facebook is currently going a lot more than it’s worth, like buying $ 1 for $ 1.98, it just doesn’t make sense at that price.
“From the basic modeling alone, stocks should be around $ 17 to $ 20, and that’s a lot of variables.
“I would call it an ideal price. I would be interested in buying and I think this is a good deal for investors. “
Among those who did not make money on Friday, when Facebook shares traded at $ 38, was former company president Sean Parker.
His shares are still worth more than $ 2 billion, but falling prices mean his fortune has shrunk by a staggering $ 300 million.
As a sign of how feelings about Facebook are changing, some commentators have begun to compare its activities to the most reckless behavior of Wall Street banks.
They also coined the word “Zucked”, which means to be sent when selling shares on Facebook.
In a withering article in Time Sam Gustin magazine wrote: “Facebook’s highly acclaimed IPO – which was supposed to be a shining moment for the social network, as well as its lead banker Morgan Stanley and the NASDAQ – has become a debate that reinforces some of the worst stereotypes about Wall Street: that corporate managers and their bankers develop IPOs to maximize profits at the expense of the public; that Wall Street’s own systems have become too complex for staff to handle; and that the whole game is a hip-hop-powered casino set up for the house with the shoot, played by the average investor. “
These big sell-offs come as new allegations emerge that over-selling Facebook shares may have been counterfeited against small daily buyers.
Two separate lawsuits have been filed against the company and the banks that organized the IPO, Morgan Stanley and Goldman Sachs, claiming that executives knew that second-quarter earnings would not live up to expectations as Facebook’s growth slowed.
Business Insider says this information was shared with the banks by an insider on Facebook. As Mark Zuckerberg continued his road show before the IPO, advertising his company, banks lowered their revenue forecasts for Facebook.
This information could have reduced the value of Facebook’s initial public offering. This, in turn, could reduce the amount of money Mark Zuckerberg and his early investors earned when they dumped tens of millions of shares on Facebook on Friday when the trade opened.
However, the banks failed to widely disclose the downgrade, the lawsuits say.
Business Insider says they only told big institutional investors to know to stay away from Facebook stocks on the first day of trading.
Facebook denied the allegations in the case and said it would “vigorously defend itself.”
Morgan Stanley says it followed the same procedure as any IPO.
Facebook’s big winners won early before the stock price fell
Here is a list of early Facebook investors who made a package by cashing out parts of their shares on Friday before stock prices fell. The value is estimated at $ 38 per share. Also included is how much money was saved from going out on Friday before the stock sank 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 Teal, co-founder of PayPal
Year invested in Facebook: 2004 for $ 500,000
Shares sold: 16.8 million
Value: $ 640 million
Saved: $ 119 million
DST Global Ltd, an investment firm based in London and founded by a Russian oligarch
Year invested in Facebook: 2009 and the end of 2010 for 200 million dollars
Shares sold: 45.7 million
Value: $ 1.74 billion
Saved: $ 323 million
Goldman Sachs, an investment bank
Year invested in Facebook: 2011 for $ 450 million
Shares sold: 28.7 million
Value: $ 1.09 billion
Saved: $ 200 million
Elevation Partners, a private equity firm with Bono as its spokesperson
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