There are two main
elements to the litigation about the IPO. The first is about how
last-minute-second-thoughts about the future earnings by an analyst should have
been widely “shared”. It’s not a strong case, much of the communication was
verbal and analysts change their minds all time. Sloppy management, yes…once
the prospectus was up everyone should have shut up, but it will be hard to
prove wrongdoing.
Section 11 of the
Securities Act, makes it a violation to publish incorrect or incomplete
information, even if unintentional. That means if something was false or
information was incomplete, even if a moronic idiot should have known it was
false, then you broke the law.
How about this
for misinformation:
Remember, the
people who lost $4 billion in the last two weeks were mainly unsophisticated
investors egged on by pathetically unsophisticated mainstream media financial
pundits…none of whom stood up prior to the IPO and said this is a crock of
horse manure. You would have thought that with the “Biggest IPO ever” at least
one of the incompetents would have said “be careful”….or perhaps they were
taking kickbacks? So much for freedom of the press!
The suckers look
at a chart like that and they say…”Ooh WOW, this is my lucky-day…in 2017
Facebook’s revenues will exceed the GDP of the whole world…where can I buy?!!!”
Nice graphic,
nice idea, upbeat-driven visionary talking about his impossible targets, but
the reality is that is just not possible. Zuckerberg is not an idiot; he knew
that chart was a big lie, so did the investment banks managing the issue.
What investors
were conspicuously not shown in between the smoke and mirrors was Zuckerberg’s
chart compared to the market for advertising, which up to now is Facebook’s
core business, and there was no suggestion that might change.
This is it for U.S.A.
It should not be
hard for a smart lawyer to convince a not-very-smart jury, that sort of information
should have been provided in the prospectus. The fact it wasn’t meant that the
prospectus was incomplete. Not that the SEC seem to care any more than they
cared when Made-Off was paying out 15% a year on his hedge fund, without any
rational explanation of how he achieved that.
If that chart
had been put up in the Road-Show then Zuckerberg could have stood in front of
the crowd and explained which sectors he was aiming to demolish like Google and
the Internet in general demolished newspapers (and radio – not shown)….but he
would have had a hard time doing that, once all the information was in place.
The simple fact
of life is that advertising revenues in total are 2.3% plus or minus 0.1% of
nominal GDP, that’s the cake everyone has to share, and no one can
realistically hope to eat the whole cake, particularly when right now they got
2%. By the way the “Fundamental” lines are based on nominal GDP, notice what a
good fit television is, and how much newspapers were hammered.
The risks that
Facebook will not be able to achieve that level of market penetration should also
have been properly presented, in the section on “Risks investors should know
about”, they were not.
The fact that
any competent market analyst could have put that chart together in twenty
minutes, counts for nothing in Facebook’s defence. In the event, even the
hot-shot financial journalists were fooled by the hype and the misinformation,
if they were fooled, how about ordinary unsophisticated investors that the
system is supposed to protect…from fraudsters?
There were only
two analysts who published anything saying Facebook was hugely over-priced prior
to the IPO….as in write down on a piece of paper in plain English and put that
up in the public view so you can find it using an internet search, saying…“Facebook
is not worth anything like $100 billion”, and they were both in what the
mainstream press calls the lunatic fringe:
The clear intent
of Section 11 is that investors in public companies should be told stuff that
they need to know in order to make a rational investment decision. That clearly
did not happen. Projections, are an important part of what investors need to
know, that’s how you can do the valuations.
And another thing,
the implicit story-line in the prospectus and the road-show, was that revenues
would track the market leader, in this case Google. That should have been clearly
communicated, it wasn’t; instead it was left to a load of winks and
half-sentences.
Anyone who
remembers the IPO frenzy of the Dot.Com bubble, knows that line is a crock of
horse manure.
Leading up to the NASDAQ bubble, the world
was full of internet or whatever type-companies, who would put an exponential
chart up on the wall as their business model, and say “well if Microsoft could
do it so can we”.
That’s exactly
the same story-line that Facebook put out. But Microsoft was in the selling
software to the market of putting a PC on everyone’s desk, and effectively they
had a monopoly. Facebook is in the advertising business, and they don’t have a
monopoly…on advertising.
It was
irresponsible and deceptive of Zuckerberg to put an exponential curve up to
show investors.
All companies,
Microsoft and Google included, grow by an S-Curve or a series of S-Curves.
Perhaps in the
euphoria of starting a hugely successful company Zuckerberg didn’t understand
that. But his minders, the investment banks, should have explained there is a
fine line between the unbounded optimism which has driven his company to
achieve extraordinary things, and the obligations of the head of a public
company, to tell investors the whole story, warts and all.
It’s all very
well to laugh at the investors who got suckered by the story, anyone who “managed”
to buy at $44 lost nearly half their bet, and it’s not coming back.
But that’s a big
part of the problem of what’s wrong with Wall Street. The SEC should lodge a
case themselves, and hammer the investment banks who allowed that crock of
horse manure to be put out as a prospectus…that’s their job.
About the Author - Andrew Butter is Managing Partner of ABMC, an investment advisory firm based in Dubai that he set up in 1999, and has been involved advising on large scale real estate investments, primarily in Dubai. (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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