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BERKO: Facebook investor has no case


Dear Mr. Berko:

I had an order in for months to buy 2,000 shares of Facebook. The day before the offering, I was informed I had 600 shares. In the early morning before the initial public offering (IPO), my brokers had an order canceled, giving me 200 more for a total of 800 shares. At the opening, I bought 1,200 more shares at $43. Two days later, I was forced to sell my 800 shares at $31.75, losing over $5,400. I was forced to sell my 1,200 shares I bought at $43, losing over $13,500 plus commission costs. A lawyer friend said the IPO was improperly handled, that the price per share was purposefully set too high (should have been $25 to $28), that the underwriters intentionally added 15 million shares to the offering and the brokers running the book knew in advance that GM was canceling its advertising. They also knew that Facebook would report lower revenues for the comparable quarter, that mobile phones were hurting Facebook’s revenues and that earnings would also be lower. He and I will be suing Facebook, the underwriters and the exchange for billions in damages. And if you know investors who want to participate in this suit, let me know. My attorney won’t charge them one dime. He lost more than me, and he’s also out for blood.

S.B., Portland, Ore.

Dear S.B.:

Thank you for that three-page letter, a good portion of which appears to be co-authored by your new lawyer friend. Reading your letter, I sensed a kind of sour earnestness that would make even dogs and psychopaths cynical. Or as my dad would say, you’re “a shiver looking for a spine to run up.” I’ve received more than a dozen disappointed letters, but this really takes the cupcake.

I’ve had negative feelings about the Facebook Inc. (FB-$31.09) concept for years. I think of FB as legalized cocaine, where lonely people go to feel good. FB’s business model attracts a membership of forlorn souls and people with low self-esteem. So it’s reasonable to conclude that a smaller percentage of FB’s members will respond to an advert than members at LinkedIn or other sites. GM recognized this, and other advertisers have come to similar conclusions.

Another reason I’m not a FB fan is that I believe there are a growing number of websites out there competing for a declining advertising dollar. FB was certainly overhyped by the media, which you and others swallowed like gulping guppies. FB’s future depends on management’s ability to mine user data, compared with what Google, Microsoft, Yahoo, etc., know about their users. FB has done a yeoman’s job encouraging so many stupids to surrender their most personal data, so the trillion-dollar question is: “Will FB be able to use this data to attract ad-supported media?

Please tell me why you were “forced to sell” your shares. The underwriters did nothing wrong. The GM news was released days prior to the IPO, and a money manager told me several “GM guys” canceled their indications after the announcement. So why didn’t you? The FB/mobile phone brouhaha is old news and was public prior to the IPO. You still bought the stock. Other negative data was released by FB, including its quarterly decline in revenues. You still bought the stock.

Like others, you were so blinded by the hype that you all assigned a value to the company its revenues could not support. Why would investors assign a $100 million capitalization to FB with $4 billion in revenues and $700 million in profits when a ConocoPhillips (COP-$55.66) had an identical $100 billion capitalization with $250 billion revenues and $12 billion in profits? The underwriters did what they were paid to do, which was to raise as much money for FB as they could. You failed in your due diligence because you were greedy, and now you’re angry because you got suckered.

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