Facebook's IPO: Lawsuits, Billions Lost, and Wall Street Wins

There is something attractive about a criminal trial. Most of our beloved shows involve violent crimes and the aftermath of police and prosecutors trying to seek justice. Maybe too many. I lost count with how many CSI shows there are.

We are enamored with the whole process and the high stakes involved. A person's liberty is at stake versus the justice rightfully needed for the victim's family. It is fundamental to our core that we see to it that criminals are punished and that's why it catches our attention.

For me though, a botched initial public offering of a tech company and the legal aftermaths captures my interest. I'm just fascinated with the idea that an attorney can wave around a disclosure form and some documentary evidence representing the current trading price of a Facebook share and win an argument. And there are many people who are trying to do just that.

In May, the news coverage was heavy on the genius of Mark Zuckerburg and the meteoric rise of the social networking site. Look in the Wall Street Journal today and there are articles about dozens of lawsuits pending against Facebook and the underwriter, Morgan Stanley.The bases for their claims is  that the required disclosures given to investors prior to the public offering were insufficient and the analysts failed to provide realistic revenue projections.

The plaintiffs, investors who lost a substantial sum of money from the IPO, argue that there should have been more information given as to  Facebook's problems with advertisement, revenue, and trend that users are accessing Facebook with their mobile devices.

In other words, the investors feel duped into buying a stock that was overvalued. It sounds ridiculous, right? They should have been more careful. Haven't they heard of "buyer beware?"

Wall Street is never simple and that has been proven with the third largest IPO in our history. There seems to be a lot of news coming forward that despite investors losing money and Facebook losing respect in the mind of investors, Wall Street ended up with more money than usual. That shouldn't sound ridiculous, they always win.

The banks used an underwriting provision called a stabilization clause, or a Greenshoe option, to minimize their risk. It paid off. While Zuckerburg lost billions, Morgan Stanley was handing out the pool of about $100 million.

Not only did banks profit from their underwriting services, they profited from taking short positions on the Facebook stock. Traders at Goldman Sachs and JP Morgan took positions that the shares would decline in value. These complicated and controversial trades almost always benefit the banks despite the damage done to the issuing company.

When its all said and done, we have laws in place which enable investment banks to engage in this business. We can put some blame on Facebook for overvaluing itself or the underwriters for failing to disclose all material information. At this point, it may not matter. The average investor lost money, Facebook lost money, and the banks made money. Like I said, it is totally legal but its like they are getting away with a crime. The banks are the ones robbing the investors.

It may be best to just watch CSI. In those shows, there is always justice at the end.