“Are Initial Public Offerings a License to Steal from the Unsophisticated Investor?”—An Analysis of the Facebook IPO Debacle and the Class Action Lawsuit…

Constance J. Crawford¹, Corinne L. Crawford², Glenn C. Vallach¹
(1. Anisfield School of Business, Ramapo College of New Jersey, 505 Ramapo Valley Road, Mahwah, New Jersey 07430, USA;
2. Borough of Manhattan, Community College, City University of New York, 100 Chambers Street, New York, USA)

Abstract: Wall Street recognizes one size only….extra large….when it comes to earnings, profits, growth and Initial Public Offerings. Perhaps that is what initially attracted the unsophisticated investors in unprecedented numbers to the Facebook IPO. Ironically, the unknowing investors’ confidence was immediately shaken when the shares failed to meet projected price targets and, the stock actually tumbles instead of rises. The deceptive valuation and pricing practices, that are rampant in the IPO and investment analysts’ arena, was successfully orchestrated during the road show that Facebook insiders participated in just prior to the May 2012 stock debut. The tale as told by the Facebook insiders just prior to the IPO stock sale at $38 per share appears to be a fairy tale and is currently the subject of an SEC investigation. Wall Street unfortunately has a very short memory. History is continually repeating itself as the lessons learned from corporate fraud and malfeasance is immediately forgotten whenever opportunity for new wealth arises. Is it greed, ignorance or inflated egos that continually drive the desire of investors to buy an IPO at any price regardless of the long-term consequences?

Key words: IPO; social media; financial statements

JEL code: M41