GUEST EDITORIAL

Facebook's lucky friends?

5/25/2012

Facebook has made a habit of advancing its interests at the expense of its customers -- whether by weakening its privacy policy, tracking users' movements around the Web, or radically reconfiguring the way information is displayed on the site's pages.

So it probably shouldn't surprise anyone that while the company's initial public offering (IPO) of stock was a boon to the company and insiders, it's been a costly disappointment for the public.

Now, some investors accuse the company and its bankers of playing the public for suckers, sharing pessimistic revenue projections with a few insiders but not average investors. The accusation has drawn the attention of Congress and federal regulators. It's serious enough to merit a thorough investigation.

It's not entirely clear why Facebook went public. Investors and employees who owned a share of the company's equity could sell it on private markets. The company's prospectus stated that it had no pressing need for the funds.

The nearly $7 billion it raised will be socked away, along with almost $4 billion in cash reserves. The more obvious winners in the IPO were venture-capital firms and other early investors who cashed out a portion of their holdings. They collected more than $9 billion.

But early buyers of the new stock paid as much as $42 a share, only to see its value plummet before recovering slightly. Reports emerged that one or more of the banks underwriting the IPO had lowered their estimates of Facebook's expected earnings, and had shared these warnings with some of their clients.

The implication is that some large investors knew enough to stay away from the IPO -- or to sell quickly to buyers who weren't privy to the latest analysis.

Facebook and Morgan Stanley, the lead underwriter of the IPO, deny they did anything wrong or unusual. Although the underwriters' lower estimates weren't made available to the public, financial media caught wind of the warnings and reported them before the stock went on sale.

Much of the coverage leading up to the IPO was negative. There was plenty of skepticism about whether Facebook's revenues ever will be large enough to justify the stock's price.

But there is a difference between information bruited about in the media and what companies and their underwriters officially disclose. If insiders disclose information that's significant enough to influence investors, securities law requires that they share it with everyone, not just a favored few.

Regulators should find out what Facebook said to its underwriters that led to their revised estimates, and whether those banks revealed data to a few that should have been disclosed to all.

Facebook's share price will rise or fall with the company's ability to mine its enormous user base for much more revenue than it does today. Meanwhile, regulators should make sure that those who bet on the company have the same information as everyone else at the table.

-- Los Angeles Times