Facebook's Tech-Snarled IPO: What We Know

Four lawsuits have arisen following Facebook's troubled initial public offering. NASDAQ's trading systems are not the first to suffer IPO day technical woes.
Facebook doesn't offer a "Dislike" button to complement its ubiquitous "Like" button, but that hasn't stopped investors from expressing their anger about the handling of Facebook's May 18, 2012 initial public offering.

At least four lawsuits have been filed, claiming that Facebook and the financial firms underwriting the IPO withheld information from investors, or that financial exchange NASDAQ was negligent for failing to anticipate computer problems that delayed share orders from being processed.

Los Angeles law firm Glancy Binkow & Goldberg LLP, on behalf of plaintiff Darryl Lazar, alleges that the IPO Registration Statement contained untrue statements or omitted necessary facts required by financial rules. Philadelphia law firm Bernard M. Gross, P.C., on behalf of plaintiffs, Jacob Salzmann, and Dennis Palkon, makes similar allegations.

The Securities and Exchange Commission is also reviewing Facebook's first day of trading to determine whether a more formal inquiry might be required.

Facebook's rocky debut as a publicly traded company on Friday was the largest tech company IPO to date and was eagerly anticipated. But the company's initial valuation, at $38 per share, appears to have been excessive. The stock slumped after trading began and closed trading on Wednesday at just below $32 per share, a decline of about 16%.

[ What should be on Facebook's Post-IPO to-do list? Read 6 Facebook Problems Need Fixing. ]

Part of the problem was technical. NASDAQ OMX Group CEO Robert Greifeld told investors at his company's annual meeting on Tuesday that his company "had mistakes in the Facebook listing," according to Reuters.

NAQDAQ also said in a public statement that its IPO Cross application, which handles the auctioning of shares, is designed to recalculate buy and sell orders when it receives order modification messages. Its system apparently received so many of these messages that trading was delayed as the software recalcuated orders, only to be forced to do so again and again, creating what's known as a race condition, as additional order modifications arrived.

A NASDAQ spokesperson declined to discuss the workings of the exchange's system beyond publicly issued statements. The company said that its trading application has been modified to prevent future race conditions of this sort.

Other trading systems have dealt with similar issues. The Better Alternative Trading System or BATS Global Markets in Lenexa, Kan., hosted its first initial public offering March 23--its own IPO--in order to illustrate how the exchange could be used for future IPOs by other firms. Upon opening, something went wrong with the trading system and BATS shares fell in value from $16 to less than a penny in a few seconds. The company terminated the offering and withdrew the IPO, acknowledging its brand had suffered a black eye in the process.

At the same time, technical issues can be avoided. NYSE hosted a social networking company IPO May 19 when it launched LinkedIn as a public company. There were 7.84 million Linkedin shares traded between a launch price of $45 and a high of $92.99 during the day, raising $4.3 billion for the company. There were no software glitches or other mishaps associated with the launch.

NYSE also hosted the post-bankruptcy return to public trading for GM, in a Nov. 17, 2010 IPO, selling 478 million shares and raising $20.1 billion. The same trading systems used in daily NYSE trading are used for an IPO. NYSE spokesmen said its systems are tested extensively on a regular basis and there is no special testing at NYSE associated with an IPO. NYSE spokesmen declined to comment on the glitches in the Facebook IPO at competitor NASDAQ.

Anthony Michael Sabino, a professor at John's University's Peter J. Tobin College of Business, said in a phone interview that while claims of securities fraud fraud aren't very plausible, there are real issues to be explored, like allegations that a Morgan Stanley analyst had negative information that was shared only with a select group of institutional investors.

"It looks like this was badly bungled by Morgan Stanley, among others," Sabino said.

Sabino believes the issues raised about NASDAQ's trading system are the most significant. "The one major thing out there I think is substantial are the allegations by investors ...that their orders were not executed in a timely manner," he said.

However, Sabino says this issue may not be settled in court, noting that the parties may be contractually obligated to resolve their dispute in arbitration.

Larry Chiagouris, a professor of marketing at Pace University’s Lubin School of Business in New York City, says Facebook's stock was priced too high.

"This stock was valued extraordinarily highly compared to currently successful tech companies," he said. "Look at Apple trading at 13.5x earnings. To then to turn around and say Facebook is worth 65x earnings seems a little uneven. There's a disconnect there."

What's more, Facebook's value to marketers is being questioned.

'The value of Facebook is basically linked to its value to marketers," said Chiagouris. "And marketers have been uneasy with Facebook, because, with some exceptions, they're not getting the results that they want to see."

Chiagouris points to GM, which just prior to the Facebook IPO said that the $10 million it had spend on Facebook advertising hadn't been effective.

Chiagouris contends that social media has been over-hyped by social media companies and by the analysts who follow them.

"Social media may not be the solution to marketing problems," he said. 'What I like to tell students and clients is that when you read a company has spent 25% to 50% of its advertising budget on social marketing, then it will have arrived. Right now, it hasn't arrived."

Additional reporting by Charles Babcock.