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You know that the hand-wringing over the almost 25 percent drop inthe value of Facebook Inc's stock since its May 17 IPO has reacheda new level of disproportion when ABC's "Good Morning America"weighs in with the idea that maybe Mark Zuckerberg should abandonhis honeymoon and return to Silicon Valley to somehow make thingsbetter for the gullible investors who got singed. Lots of reasons have been posited for the Facebook IPO "debacle" -as the news media likes to describe it - including that perhapsZuckerberg, the company's founder and chief executive officer, andhis management team failed to disclose declining quarterlyadvertising revenue in a timely way. Or that Nasdaq OMX Group Incfailed to process initial purchase and sale orders properly on IPOday. Or that some underwriters passed "quiet guidance" to big,institutional investors about Facebook's financial prospects butnot to smaller investors. Or that technical "trading glitches"caused the problem. Or that Morgan Stanley, Facebook's leadunderwriter, botched the whole IPO process. Burned investors will grasp at anything - except their own role infueling Wall Street's Facebook IPO hype machine - in an effort torecoup some of the billions of dollars they have lost as the stockcontinues to slide. On May 23, the plaintiff's bar got into the actby filing three separate shareholders lawsuits accusing Facebook'smanagement, board and underwriters of failing to provide materialinformation about the company's second-quarter financialperformance to small investors during the roadshow, while providingthe same information to some institutional investors. This, thesuits claim, caused the small investors to lose more than US$2.5billion after Facebook's IPO. The Diepersloots The New York Times managed to find Robert Diepersloot, a dairy farmer in Madera,California, who said the Facebook IPO "confirmed all the fears andsuspicions" that led him and his wife to take all of their savings- in the tens of thousands of dollars - out of the stock market andinvest it, instead, in real estate. (Good luck with that Mr.Diepersloot.) "We just pulled out completely," he told the paper."We've lost trust in the whole scenario." OK, once and for all: When will small investors finally get themessage that investing in IPOs is a fool's game and that yet againthey served as mere grist for Wall Street's IPO selling machine?The current IPO market - controlled by Wall Street's cartel of fiveor six leading firms - exists only to benefit three groups ofconstituents. Foremost are the Wall Street banks themselves, which reap hundredsof millions in fees from the IPOs whether the resulting stock pricegoes up or down. Either way, Wall Street makes money. The second group consists of Wall Street's big institutionaltrading partners - the ones that provide banks with huge fees everyday of the week, whether or not there is an IPO to be hyped andpriced. For obvious reasons, Wall Street wants to keep these biginvestors happy. That is why they are sometimes given (inside)information about a company that small investors are not given - ashas been alleged in the Facebook shareholder lawsuits. IPOs are priced to put money in these big shareholders' pockets,either by underpricing the company in the first place so that it"pops" when it begins trading, allowing the institutionalshareholders to flip the stock quickly after it rises in earlytrading, or by giving them information that will allow them to getout fast while smaller investors are getting in. Lowest priority Third on the list of priorities is the company being taken public.The Wall Street underwriters strive to get just enough value in theIPO to keep the company's management and early investors happy,while also leaving enough on the table so institutional investorsget their "pop." Wall Street wants its IPO clients to stick around for the longerterm, so that additional fees can be generated from futuresecondary offerings, as well as future debt offerings, mergers andwealth management services. Wall Street is engaged in a delicatebalancing act between its fee interests and those of itsinstitutional trading partners and its corporate-finance clients. You'll notice, of course, that small investors don't make the listof important constituents. Their concerns are nearly irrelevant tothe Wall Street cartel, despite the marketing dollars that bigfirms often invest in attracting small investors to their brokeragebusinesses. Not that banks hate small investors - they generatefees (through churning those brokerage accounts) and they provideliquidity to the market - for example, in the form of misplaceddemand for IPOs. But Wall Street sees little point in keeping theminformed or helping them make wise decisions. That Facebook's IPO would be a product of the Wall Street hypemachine was obvious from the beginning. For at least the past 18months - starting perhaps with the January 2011 investment byGoldman Sachs Group Inc into the company that valued it at US$50billion - Facebook has been awarded one ridiculous valuationmilestone after another. It's easy to blame Wall Street for all this hype, and it's easy toblame Facebook's management for whipping up the valuation frenzy.It's also easy to blame Nasdaq for botching the orders or MorganStanley for mismanaging the process. The truth is that if small investors simply remembered they arenowhere to be found on the list of important constituents for anIPO such as Facebook's, and simply stayed away, the traditionalWall Street IPO machinery would break down. Is that a lesson thatcan be finally learned, once and for all? William D. Cohan is a former investment banker and the author of"Money and Power: How Goldman Sachs Came to Rule the World." Theopinions expressed are his own. We are high quality suppliers, our products such as Digital Sports Wrist Watch Manufacturer , Lcd Wrist Watch for oversee buyer. To know more, please visits Silicone Wrist Watch.
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