I’ve been following the facebook scandal since before the stock hit the street. In Facebook Flop, Too Big to Succeed, I said "IPO's commonly find their way into mutual funds. So if you own a mutual fund you might have lost a few bucks on facebook and don’t know it [yet]. That’s another hidden cost of pooled investment products..." – a.k.a. mutual funds.
On July 8th my hunch was proven true in a Wall Street Journal article highlighting more than one hundred U.S. based mutual funds that took a beating on facebook stock. According to my calculations, owners of mutual funds listed in that article lost more than $500 million on facebook. While some companies have liquidated portions of their positions, others haven’t, and still others can’t sell out due to regulatory constraints. In other words, many mutual fund owners continue to lose money on the losing proposition that facebook turned out to be.
I call it a scandal because that’s indeed what it was. The IPO, which was botched from the start, came with a despicable parade orchestrated by the Wall Street establishment that was covered in gross amounts throughout the media. The disgusting display of greed and corruption came at a time of great economic stress for many Americans, many of whom are mutual funds owners. The charade, promulgated by those with mass media credentials, is the latest example of Wall Street propaganda, dishonesty and deception.
Of the many mutual funds listed in the aforementioned WSJ article, lead underwriter Morgan Stanley positioned facebook most aggressively in their mutual funds, allocating an average of 6% per fund to the social media company. That’s a crazy allocation!!!
In 15-51 methodology, a 6% allocation is one of the top three stock selections in the entire portfolio. Placing such a weight on any IPO is nuts – let alone one with declining growth and exploding costs. That’s facebook – and Morgan Stanley knew it long before street date.
In its first public announcement of operations, facebook recently reported $1 billion in revenue and $2 billion in expenses – and they expect that trend to continue! Forgive me, but doesn’t that sound like government work? One wonders where the $100 billion IPO valuation came from.
Yet despite this or their prior knowledge, Morgan Stanley fund managers placed facebook at the top of their allocation models in mutual funds partially entitled: Growth Trust, Focus Growth, and a series of Institutional Opportunity and Advantage funds. I don’t know about you, but it doesn’t sound like the facebook IPO belongs in any one of those funds.
The extravaganza surrounding the facebook IPO was like no other. Millions of people all across the globe use the social network and were curious to see how it would fare in the public arena. Others looked forward to the opportunity of finding out more about facebook’s operations, how it made money, and how much it made.
But even with all the fanfare surroundng it, I couldn’t find a single person interested in buying facebook stock. In fact, just a few days before street date I asked my friend Craig, a savvy and experienced trader, what he thought about facebook. He said, "Dead on arrival. I wouldn’t touch it with a ten foot pole" — which was a consistent theme throughout my network. And in the end, it wasn’t people that bought into the facebook hype but mutual funds.
Fidelity, one of the nation’s largest mutual companies, placed facebook shares in no less than 39 of its mutual funds spread amongst many different types, from growth to income funds, conservative to aggressive funds, to income and value funds. Fidelity had facebook in almost every possible mutual fund class, their customers losing some $300 million on the deal so far.
That’s why I say you can do better than your broker and mutual fund manager! Most people who would never buy facebook stock lost money on it through their mutual funds.
Let us also not forget that Morgan Stanley and Goldman Sachs downgraded facebook’s operating position before it went public. Yes, Morgan Stanley downgraded the stock and then loaded up on it their mutual funds. Doesn’t that sound dirty?
This, of course, is not to mention that in the face of its own downgrade, Morgan Stanley had the audacity to raise the IPO price and number of shares to be sold just days before facebook’s public debut. This prompted Goldman Sachs to brashly state that it would sell half of its facebook position if the IPO was priced at $38. These moves, no doubt, contributed to some of the technical errors experienced when the NASDAQ market opened trading for facebook stock.
That’s why large Swiss bank UBS, who lost $350 million on the facebook scam, is pursuing legal action against the NASDAQ. They’re trying to recoup some of their loss and who could blame them? Heck, if UBS had any guts they’d be suing Morgan Stanley, the true villain, but that would be bad for business and the industry in which UBS operates. For that reason, the NASDAQ will serve as the sacrificial lamb in this case.
The facebook IPO was a heist of epic proportions. Facebook and the Wall Street establishment bought low and manipulated the system to sell high to a mutual fund community who never saw it coming through a parade-like diversion. Sadly, many mutual fund owners continue to lose money on facebook and still don’t know it.
And that’s what motivates me. You can call it a Muse called Morgan.
It’s time to Lose Your Broker Not Your Money. You can do better than them!