The lawsuit was filed in U.S. District Court in Manhattan on Wednesday, according to a law firm for the plaintiffs. A day earlier, a similar lawsuit by a different investor was filed in a California state court, according to a law firm involved in that case.
In the New York case, shareholders say research analysts at several of the Banks underwriters had lowered their business forecasts for Facebook during the IPO process, but that these changes were 'selectively disclosed by defendants to certain preferred investors' rather than to the public generally.
It's true that Dodd-Frank, the legislation responding to the 2008 economic collapse, hasn't worked — because it hasn't been put in place. At the heart of the proposed reforms is the "Volcker rule," named for a former Federal Reserve chairman, which attempts to separate banks' gambling from their government-backed deposits. This mimics the situation before the Depression-era Glass-Steagall law was repealed in 1999.
Banking lobbyists managed to weaken the Volcker rule in 2010 by securing exemptions. Even the watered-down version has been slowed by a barrage of objections from executives — none louder than Dimon. And regulators haven't had the funds to keep up with the workload. The result is that key parts of the law haven't been implemented.
Now industry-friendly lawmakers are using the scandal to discredit never-implemented regulations. Although reformers hoped the JPMorgan losses would give them momentum, it's a good bet the company will win the argument, if only because it holds so many IOUs.
And Pennsylvania Republican Pat Toomey judged that "we've gone down the wrong road" with Dodd-Frank. The better course, he said, is a less intrusive plan that would "let the people in the marketplace make the decisions they will make."
The system is effectively set up so underwriters win no matter what. The early individual investors who had Facebook stock pushed on them by their advisors from the likes of Morgan Stanley Smith Barney -- they weren't so lucky. As the IPO increasingly looked ready to crumble and more shares were offered, the investment banks used their army of advisors -- the ones charging clients a 1% fee to keep their cash in a money market fund that yields 0.2% -- to pawn off shares. Bloomberg has reported that retail investors are sitting on more than $630 million in losses.
Most brokers likely had no idea they were eagerly filling requests for Facebook shares as institutional clients with better access to information ran away from the offering. In many ways, these brokers are individuals like me and you. The problem is they were mere pawns to their larger bank's game, but harmful pawns nonetheless.
And so the plan was complete. Wall Street had managed to take Facebook public at an elevated price, effectively shorted the shares and made a profit, and then pawned off the shares on an unsuspecting public who gobbled up Facebook as a "can't-miss investment." The illusion of easy money was created, only to see Wall Street rob Americans who had a huge information disadvantage.
And you paid them a lot for that service. For your sake, I hope you feel used right now.
It's not that every IPO needs to pop. That's not the point at all. And it's not that people shouldn't take personal responsibility for their own poor decision to buy a risky stock.
The broader point is that Wall Street has created a system that uses individual investors and at the same time is rigged against them. While Wall Street might look at several of the practices above and shrug them off as "business as usual," these are the sort of self-serving actions filled with conflicts of interest that don't treat the vast majority of their clients with a modicum of respect. No wonder there are record-low levels of trust in the financial industry.
It's time for investors around the world to do better.
Yeah the underwriters always make a huge guaranteed profit. But if they would have set the stock price lower and it did pop because of investor interest then they would make an even larger sum. What the article doesn't touch on is the underwriters actually stabilized the price at $38 on the opening Friday to prevent it from falling below their target in the latter part of trading... It's not like they set it high then instantly jumped ship.
And for the record I don't really enjoy defending these people who make huge sums at what they do, screwed up, and cost people a lot of money, but these articles are so slanted towards levying angst without the full story someone's gotta do it.
No, Morgan Stanley basically did everything for the facebook IPO with JP Morgan and Goldman Sachs on the sidelines just getting some shares to buy. JP Morgan's fiasco was all internal issues.
I agree with Kird - IPO's have always been somewhat of a rigged game. Hell, the stock market has always been a rigged game: I have read this 1923 book from Jesse Livermore. Check it out, the more things change, the more they stay the same.
A good lesson is that if your broker or friend approaches you about an IPO, say no. The only reason an IPO is ever made available to the general public is when it is having trouble. Because as Kird says the underwriter's take is baked in always. They don't need the masses to make it happen. The only time they do is when they don't have enough interest in the secondary market to sell the shares into.
