WEBVTT - The Facebook Financial Fiasco 0:00:00.280 --> 0:00:02.920 Brought to you by the reinvented two thousand twelve Camray. 0:00:03.160 --> 0:00:08.880 It's ready. Are you get in touch with technology? With 0:00:08.960 --> 0:00:17.599 tech Stuff from how stuff works dot com. Well, hello there, 0:00:17.760 --> 0:00:20.360 and welcome to tech Stuff. My name is Chris Pollette, 0:00:20.400 --> 0:00:22.400 and I'm an editor at how stuff works dot com. 0:00:22.720 --> 0:00:25.520 And sitting across from me, as he typically does, is 0:00:25.600 --> 0:00:31.960 senior writer Jonathan stricklandt Mike here hu hut, Mike. I 0:00:31.960 --> 0:00:35.400 don't know what possessed you to introduce the show that way, 0:00:35.760 --> 0:00:40.320 but hey, guys, I don't know a little bit of 0:00:40.360 --> 0:00:42.560 a mellow Friday. I guess let's take it down to 0:00:42.640 --> 0:00:46.839 not actually one of the thing that we're going to 0:00:46.920 --> 0:00:50.519 talk about today could be a little slow and you know, 0:00:50.560 --> 0:00:52.320 in places for some people. But I think we're going 0:00:52.360 --> 0:00:54.160 to try to make some sense out of it. Yeah, 0:00:54.240 --> 0:00:57.240 that's try is the operative word here, all right. So 0:00:57.640 --> 0:01:00.400 we already talked about Facebook and the fact that it 0:01:00.440 --> 0:01:03.160 was going to hold an I p O and initial 0:01:03.280 --> 0:01:07.440 public offering. Basically they're going to in the past when 0:01:07.440 --> 0:01:09.199 we were talking about this, they're going to put out 0:01:09.319 --> 0:01:11.679 stock so that people can buy shares in the company. 0:01:11.680 --> 0:01:14.600 And they were actually to some degree forced to do, 0:01:14.720 --> 0:01:17.680 so they reached a certain size for a certain length 0:01:17.720 --> 0:01:21.560 of time, and basically there was a responsibility that they 0:01:21.560 --> 0:01:24.760 had to take themselves public, going from private company to 0:01:24.800 --> 0:01:29.640 public company. And then uh, in May they made their 0:01:29.680 --> 0:01:34.919 initial public offering and billions of dollars. Yeah, it's actually 0:01:34.920 --> 0:01:38.360 we should probably talk a little bit about that. Excuse me. 0:01:39.240 --> 0:01:43.800 So the I p O goes out and on May 0:01:43.880 --> 0:01:50.800 sev Facebook ends up raising about sixteen billion dollars in 0:01:50.800 --> 0:01:54.040 in uh the first day there. That's that's how much 0:01:54.080 --> 0:01:57.040 they made in their I p O. But the interesting 0:01:57.080 --> 0:01:59.600 there are several interesting things about this. One is that 0:02:00.480 --> 0:02:05.240 the opening price for a share of Facebook stock was 0:02:05.320 --> 0:02:08.840 thirty eight dollars, right, but which actually, from why understand, 0:02:08.880 --> 0:02:11.960 been adjusted down slightly from what it was originally going 0:02:12.000 --> 0:02:15.560 to be. Yeah, And and what happens is, um, don't 0:02:15.560 --> 0:02:18.800 ask me to explain the stock market to you, um, 0:02:18.840 --> 0:02:21.359 But in general, what happens is they set sort of 0:02:21.400 --> 0:02:24.440 a range of prices what they expect to launch at. 0:02:24.760 --> 0:02:27.320 And it has to do in part with the the 0:02:27.440 --> 0:02:32.320 valuation of the company, what investors think the company is worth, 0:02:32.480 --> 0:02:35.600 and also what you know, how the company has been 0:02:35.600 --> 0:02:38.960 performing recently. So that and that's going to play a 0:02:39.040 --> 0:02:40.960 really big role in our discussion here. Yeah, I thought 0:02:41.000 --> 0:02:43.600 it was worth about fifteen cents, but they shouted me 0:02:43.639 --> 0:02:46.040 down on that, right, So they said thirty eight dollars 0:02:46.040 --> 0:02:48.720 per share, which, by the number of shares that were 0:02:48.800 --> 0:02:52.240 out going to be available on this initial public offering, 0:02:52.680 --> 0:02:55.720 would have put the value of Facebook and about one 0:02:55.800 --> 0:02:59.560 hundred and four billion dollars. So yeah, if you if 0:02:59.600 --> 0:03:02.160 you sell it for scrap, that's what they felt like 0:03:02.200 --> 0:03:04.560 it was going to be working, right essentially, So that's 0:03:04.760 --> 0:03:08.240 I mean, that's a huge, huge amount of money and 0:03:08.240 --> 0:03:10.880 in fact was going to make Facebook, in fact did 0:03:10.880 --> 0:03:15.600 make Facebook the biggest tech I p O in history, 0:03:15.800 --> 0:03:17.720 not the biggest I PO in history, but the biggest 0:03:17.720 --> 0:03:20.760 one for a tech company for now. For now. Yeah, 0:03:20.880 --> 0:03:23.560 the records were made to be broken, right, but the 0:03:23.840 --> 0:03:31.240 entire thing has kind of spiraled into this semi scandalous 0:03:31.400 --> 0:03:37.560 uh story. Yea, and scandal depending upon your own perspective, 0:03:37.640 --> 0:03:41.280 because it may very well be that even if things 0:03:41.840 --> 0:03:46.440 that you might think unethical happened, if even if the 0:03:46.440 --> 0:03:49.320 actions you think are unethical, even if those did happen, 0:03:49.640 --> 0:03:52.080 it may very well be that those unethical actions are 0:03:52.120 --> 0:03:57.400 not in themselves illegal us as a caveat for our 0:03:57.720 --> 0:04:00.040 the conversation that has taken place so far and and 0:04:00.240 --> 0:04:03.240 is to come. Um. As of the date we're recording 0:04:03.280 --> 0:04:07.840 this in May, Facebook stock has been out on the 0:04:07.880 --> 0:04:11.480 market for approximately one week. It was actually we record 0:04:11.480 --> 0:04:14.440 on Friday, so it was done the thursday before. Uh 0:04:14.600 --> 0:04:17.680 so it's been one week in a day. So um. 0:04:17.720 --> 0:04:20.120 A lot of this material that we that that we 0:04:20.160 --> 0:04:24.840 will be talking about is stuff that came out this week. UM, 0:04:24.960 --> 0:04:27.520 So we record in advance, so they're they're probably if 0:04:27.520 --> 0:04:30.600 you're going what everybody knows about this, you know and 0:04:30.680 --> 0:04:32.720 how far it goes, Well, it's gonna bee that came 0:04:32.720 --> 0:04:34.680 out after we recorded this, so we wanted to talk 0:04:34.680 --> 0:04:37.560 about it because it's it's weird. We're recording it specifically 0:04:37.600 --> 0:04:43.520 on MA and UM on. The closing price of Facebook 0:04:43.560 --> 0:04:48.120 stock on May was thirty two point o six, so 0:04:48.320 --> 0:04:51.320 it dropped from thirty eight to thirty two, and some 0:04:51.400 --> 0:04:55.960 analysts think that that's not going to be that's not 0:04:55.960 --> 0:04:58.680 gonna be the end of it. Then in fact, Facebook 0:04:58.680 --> 0:05:02.719 stock could fall as far down as twenty two dollars 0:05:02.720 --> 0:05:07.080 a share by November, which would be a dramatic would 0:05:07.080 --> 0:05:12.359 be a decrease in value, which in in investment terms 0:05:12.480 --> 0:05:15.800 is what we usually call a bad thing, assuming that 0:05:15.839 --> 0:05:18.520 you're actually buying stock in Facebook. We'll talk about some 0:05:18.560 --> 0:05:21.599 of the other elements here too. So here here's something. 0:05:22.040 --> 0:05:25.839 There were several things that were strange about the the 0:05:25.920 --> 0:05:30.600 first day of trading for Facebook. Thing number one. So 0:05:30.800 --> 0:05:34.480 Facebook stock trades on in the US on NASDAC, the 0:05:34.560 --> 0:05:37.320 NASDAC Stock exchange for a couple of different stock exchanges, 0:05:37.440 --> 0:05:39.839 NASADA is one of them. Yeah, And then a stock 0:05:39.880 --> 0:05:44.640 exchange is basically a place where representatives by and sell 0:05:44.920 --> 0:05:47.320 shares of stock. So if you work through an investor, 0:05:47.839 --> 0:05:50.160 uh and put in in order, the investor will talk 0:05:50.200 --> 0:05:52.720 to the representatives on the trading floor and they put 0:05:52.720 --> 0:05:56.640 in the order for you. Um, and the stock prices 0:05:56.960 --> 0:06:00.719 change in the blink of an eye so times less. 0:06:01.279 --> 0:06:03.719 So you know, you you say, hey, I want to 0:06:03.800 --> 0:06:06.440 buy um, let's say it it I p O is 0:06:06.440 --> 0:06:08.000 at thirty eight dollars And you say, well, I'm not 0:06:08.040 --> 0:06:09.880 going to hit it right away. I want I want 0:06:09.880 --> 0:06:13.680 to buy fifty shares of Facebook immediately, and then you'll 0:06:13.760 --> 0:06:16.880 you'll get it at whatever price it is. Then um, 0:06:16.920 --> 0:06:18.880 you might say oh, well, I want to when it 0:06:18.960 --> 0:06:22.080 hits forty dollars or less. Then you know if it 0:06:22.279 --> 0:06:24.440 if it goes up to forty, you've missed your shot 0:06:24.520 --> 0:06:27.920 until it drops back down. So the the exchanges where 0:06:28.160 --> 0:06:31.039 they make trades and things like that happen, and just 0:06:31.080 --> 0:06:33.320 like that they make trades happen, we should we should 0:06:33.320 --> 0:06:38.880 also mention that in in and investing their multiple strategies. 0:06:39.360 --> 0:06:42.440 So you've got people who are like day traders, who 0:06:42.680 --> 0:06:47.000 are looking for the really short term turnaround, like they 0:06:47.120 --> 0:06:51.960 like high volume, high volatility. That's what day traders thrive 0:06:52.040 --> 0:06:54.640 on because they're trying to make lots of money and 0:06:54.680 --> 0:06:58.280 as little time as possible, which is kind of like betting. Yeah, 0:06:58.360 --> 0:07:01.920 it's like gambling. So you're you're betting that a stock 0:07:02.040 --> 0:07:04.200 price is going to fall or going to rise in 0:07:04.240 --> 0:07:06.360 a certain amount of time, and you're trying to make 0:07:06.400 --> 0:07:09.280 money off of that. Then there's the long term investment 0:07:09.279 --> 0:07:11.560 where you're thinking, no, I'm buying shares in this because 0:07:11.560 --> 0:07:14.720 I believe in this company. I believe that this company 0:07:14.800 --> 0:07:19.400 ultimately is going to uh to succeed over the next 0:07:19.400 --> 0:07:22.720 several years. And so this is a true investment in 0:07:22.720 --> 0:07:24.600 the company, and that I will get a return on 0:07:24.640 --> 0:07:27.840 that investment. Perhaps I'll actually get paid out returns on 0:07:27.960 --> 0:07:33.000 my on my investment dividends exactly instead of looking just 0:07:33.080 --> 0:07:38.400 to buy and sell. So anyway, on that day, on 0:07:38.520 --> 0:07:43.120 May sevente what what was typically happens on a trading 0:07:43.200 --> 0:07:47.040 day is that the stock market, the Nasdaq Stock Exchange 0:07:47.200 --> 0:07:50.800 begins trading at nine thirty in the morning, however Eastern 0:07:50.840 --> 0:07:54.320 Standard time Eastern Stanard time. However, for I p o 0:07:54.440 --> 0:07:59.280 s for initial public offerings, those trading UH shares usually 0:07:59.360 --> 0:08:02.760 don't pick up until an hour after the market opens 0:08:03.200 --> 0:08:06.160 at least, so you usually have about an hour or 0:08:06.200 --> 0:08:09.560 maybe a little bit longer of grace time between when 0:08:09.560 --> 0:08:11.920 the market opens and when an I p O actually 0:08:11.920 --> 0:08:20.160 begins its initial trading. So NASDAC had planned on the 0:08:20.160 --> 0:08:24.320 Facebook shares starting to go on trade on the floor 0:08:24.320 --> 0:08:28.720 at around eleven o five in the morning. But eleven 0:08:28.800 --> 0:08:32.120 in the morning comes and goes, and no shares are 0:08:32.160 --> 0:08:36.040 being traded, and this already kind of got some potential 0:08:36.080 --> 0:08:40.240 investors a little worried, like what is going on? And 0:08:40.280 --> 0:08:44.880 then uh, they finally started to go started to trade 0:08:44.920 --> 0:08:47.960 at around eleven thirty in the morning. And the reason 0:08:48.040 --> 0:08:50.520 for the delay or one of the reasons for the delay. 0:08:50.559 --> 0:08:52.360 First of all, Nasdac says the reason for the delay 0:08:52.440 --> 0:08:56.600 was a technical glitch, but one of the one of 0:08:56.600 --> 0:08:58.960 the and there were there were several things that fell 0:08:58.960 --> 0:09:01.040 out over that, and it's still as of the recruiting 0:09:01.040 --> 0:09:06.720 of this podcast, it's still unfolding. But one of the 0:09:06.960 --> 0:09:11.240 possible reasons for the delay is that a lot of 0:09:11.520 --> 0:09:16.320 significant number of shares, or rather a significant number of 0:09:16.360 --> 0:09:21.800 shares switched what was going to happen before trading started. 0:09:22.280 --> 0:09:25.000 So in other words, before trading starts, you usually have 0:09:25.480 --> 0:09:29.520 sellers who who express an interest in selling a certain 0:09:29.640 --> 0:09:32.960 amount of stock and buyers who say they want to 0:09:32.960 --> 0:09:35.320 buy a certain amount of stock. And as that goes 0:09:35.360 --> 0:09:38.000 and tries to match up the buyers with the sellers 0:09:38.040 --> 0:09:41.079 so that its smoothly begins as soon as the trading opens. 0:09:41.360 --> 0:09:43.200 Because there are a certain number of shares of stock, 0:09:43.320 --> 0:09:47.280 it doesn't continually just make new shares. I mean there's 0:09:47.480 --> 0:09:50.000 there's you know, because there's a limit to the number. 0:09:50.080 --> 0:09:54.480 You if you can't have more shares being bought then sold, 0:09:55.559 --> 0:09:58.160 h but you can't have more shares sold than But 0:09:59.640 --> 0:10:02.080 that's what turned out to be the case, what happened 0:10:02.160 --> 0:10:07.319 was a lot more of the initial investors in Facebook 0:10:07.559 --> 0:10:14.040 seemed to want to sell shares then had originally been 0:10:14.160 --> 0:10:17.480 UM been planned for. So so, in other words, a 0:10:17.520 --> 0:10:21.600 lot of companies, really banks things like that that had 0:10:21.960 --> 0:10:26.080 a significant interest in Facebook wanted to dump that stock 0:10:26.280 --> 0:10:30.920 faster than what NASDAK had planned for because something had 0:10:31.040 --> 0:10:34.400 changed before trading began. Yeah, and it's important to note 0:10:34.400 --> 0:10:36.840 too that you may say, well, if they didn't trade 0:10:37.320 --> 0:10:40.920 until thirty, how did they get that? Well, UM, and 0:10:41.000 --> 0:10:44.160 the cases of of I p O s like this UM, 0:10:44.360 --> 0:10:47.160 people who are involved in the company, say co founder 0:10:47.160 --> 0:10:50.680 and CEO Mark Zuckerberg, people who are involved with the 0:10:50.679 --> 0:10:53.600 company have a certain amount of stock that they are 0:10:53.640 --> 0:10:56.280 granted as a you know, hey, you have a thousand 0:10:56.280 --> 0:10:58.400 shares of stock for working for us. As soon as 0:10:58.440 --> 0:11:00.760 it starts trading, you will be given the option to 0:11:01.800 --> 0:11:04.280 you know, to have that stock, to own that stock 0:11:04.400 --> 0:11:07.400 right there reserved for you. So these investors already have 0:11:07.559 --> 0:11:09.679 a certain part of the company, and so they are 0:11:09.720 --> 0:11:13.199 granted an equivalent amount of you know, stock that as 0:11:13.200 --> 0:11:15.360 soon as the stock market starts trading, they can sell 0:11:15.480 --> 0:11:17.800 that if they want to. So they didn't have to 0:11:17.840 --> 0:11:22.120 go buy it and then sell it again, so just 0:11:22.440 --> 0:11:24.840 if you were wondering where that came from. So they 0:11:24.880 --> 0:11:28.040 already had a share. Within the first thirty seconds of trading, 0:11:28.520 --> 0:11:32.920 eighty million shares changed hands. That's a lot. That's a 0:11:32.920 --> 0:11:36.480 lot of that's a lot of shares. And then, uh, 0:11:36.520 --> 0:11:41.320 there were several other problems that cropped up um after 0:11:41.400 --> 0:11:44.280 this technical glitch thing. One of them was that some 0:11:44.360 --> 0:11:47.800 traders were reporting that they were getting delays when they 0:11:47.800 --> 0:11:51.960 were putting in orders, so they weren't really sure if 0:11:52.040 --> 0:11:56.559 the shares that they had had transferred over or if 0:11:56.559 --> 0:11:58.880 they were buying a share, they weren't really sure whether 0:11:58.960 --> 0:12:01.079 or not they possessed it at this point because they 0:12:01.080 --> 0:12:04.240 were getting delays in the system. And on top of that, 0:12:04.920 --> 0:12:09.600 um there were other issues, uh, not just not just 0:12:09.679 --> 0:12:12.040 the delays, but that traders were saying that they were 0:12:12.040 --> 0:12:15.960 getting charged a higher price than what they had expected 0:12:16.000 --> 0:12:19.320 based upon when they made their purchase. These are both 0:12:19.360 --> 0:12:25.120 really bad things in general. Now, the real scandal surrounding 0:12:25.160 --> 0:12:29.360 the Facebook I p O doesn't really involve that. I mean, 0:12:29.400 --> 0:12:32.559 that's a problem, but that's a NASDAC problem, not necessarily 0:12:32.600 --> 0:12:38.079 a Facebook problem. The scandal is about why these initial 0:12:38.160 --> 0:12:44.440 investors started to sell off shares or large companies that 0:12:44.480 --> 0:12:46.760 had the opportunity to buy up shares, why they did 0:12:46.800 --> 0:12:51.079 not rush into the market. And it's the difference between 0:12:51.120 --> 0:12:55.880 how a company like Facebook treats these major investors versus 0:12:56.440 --> 0:13:02.200 the average investor. So let's to to really explain this, 0:13:02.240 --> 0:13:05.560 it will be helpful to kind of make an analogy. 0:13:05.880 --> 0:13:10.360 Let's say that Chris is a fat Cat banker who 0:13:10.440 --> 0:13:14.679 runs fat Cat Banking Limited, sitting here, I don't know, 0:13:15.040 --> 0:13:19.560 and then I am average Joe, the investor for Facebook. 0:13:19.720 --> 0:13:23.520 I just want I want to buy a share of Facebook. Well, 0:13:24.920 --> 0:13:28.080 what seems to have happened, and this is all alleged 0:13:28.200 --> 0:13:30.920 at this point, because as of the recording of this podcast, 0:13:30.920 --> 0:13:34.160 there has not been an investigation UH and there's only 0:13:34.200 --> 0:13:36.920 been sort of some vague accusations. So I want to 0:13:36.960 --> 0:13:40.240 say that what appears to have happened based upon the allegations. 0:13:41.000 --> 0:13:43.880 What appears to have happened is that Facebook took a 0:13:43.920 --> 0:13:48.120 look at its UH last quarter results and they did 0:13:48.160 --> 0:13:52.960 not perform up to the expectations of the company, which 0:13:53.000 --> 0:13:55.280 means that Facebook was not making as much money as 0:13:55.280 --> 0:13:59.320 it had wanted to And this is something that affects 0:13:59.520 --> 0:14:03.400 the investor community because again, the value of a company 0:14:03.440 --> 0:14:07.040 and part is about how well it's doing in the marketplace. Right. 0:14:07.160 --> 0:14:11.360 The once you become public under well, you're you're governed 0:14:11.360 --> 0:14:13.760 by the laws of wherever the stock exchanges. So under 0:14:13.800 --> 0:14:20.560 American law, UM, the Securities and Exchange Commission require uh 0:14:20.600 --> 0:14:24.560 that you, as a public company, file documents with them 0:14:24.680 --> 0:14:27.920 letting them know what's going on. And that information is 0:14:27.960 --> 0:14:30.880 public knowledge. So you have to say, look, I think 0:14:30.920 --> 0:14:33.920 we're gonna sell more stuff than we've ever sold before, 0:14:34.080 --> 0:14:37.960 or you know, last quarter half of our customers ditched 0:14:38.040 --> 0:14:40.560 us and went to another provider. You have to let 0:14:40.560 --> 0:14:43.800 them know that you have to divulge. So yeah, and 0:14:43.840 --> 0:14:46.800 so this is the thing they had. You know, being private, 0:14:46.840 --> 0:14:48.640 you can keep all of that to yourself because you 0:14:48.680 --> 0:14:52.160 don't have to worry about the the investor. But um, 0:14:52.240 --> 0:14:55.960 in this case, the federal government was you know, requiring 0:14:55.960 --> 0:14:59.800 them to to make this information public. Um. And what 0:15:00.040 --> 0:15:04.240 happens in this case too is that they the big 0:15:04.240 --> 0:15:08.520 wigs in the company, are responsible for going out on 0:15:08.520 --> 0:15:10.440 what they call a road show. So they have to 0:15:10.440 --> 0:15:13.560 go out and speak to investors and tell them about 0:15:13.560 --> 0:15:16.240 the health of the company, about what they expect going forward, 0:15:16.280 --> 0:15:18.680 about their performance in the past, and all sorts of 0:15:18.720 --> 0:15:22.320 little details Mark Zuckerberg had, But Mark Zuckerberg has a 0:15:22.360 --> 0:15:25.120 mole on his left, you know, temple, and that means 0:15:25.200 --> 0:15:27.800 that we're going to be more profitable. All sorts of 0:15:27.880 --> 0:15:30.360 little details. It's not those kind of things. But give 0:15:30.400 --> 0:15:34.160 it like a high rolling ad campaign. Yeah, this is 0:15:34.160 --> 0:15:36.960 why you should invest in us. We we really think 0:15:36.960 --> 0:15:40.479 we're going to grow. This is what the forecast indicates. 0:15:40.880 --> 0:15:43.200 And but that information has to be made public under 0:15:43.240 --> 0:15:48.200 this law. So here's the thing. Apparently, according to the allegations, 0:15:49.120 --> 0:15:54.320 uh some person in the know in Facebook went to 0:15:54.800 --> 0:15:58.560 some of the largest banks that were part of handling 0:15:58.640 --> 0:16:02.520 this whole I p O system. Uh so Morgan Stanley 0:16:02.520 --> 0:16:07.240 being chief among them, and went to went to these 0:16:07.240 --> 0:16:12.720 banks and said that the last quarters financial results were 0:16:12.800 --> 0:16:18.480 poorer than expected and that would in fact affect the 0:16:18.680 --> 0:16:22.320 value of the company somewhat, Which meant that these these 0:16:22.440 --> 0:16:27.160 large institutions had enough information to know, hey, maybe we 0:16:27.160 --> 0:16:30.520 shouldn't buy up a whole bunch of Facebook stock because 0:16:30.520 --> 0:16:33.880 it could be overvalued. That thirty eight dollars per share 0:16:34.400 --> 0:16:38.200 may not really reflect the value of the company based 0:16:38.240 --> 0:16:42.640 upon these last quarter results. But Facebook did not divulge 0:16:42.640 --> 0:16:45.800 the information to the average investors. So, in other words, 0:16:46.080 --> 0:16:49.360 Chris gets a phone call and he gets a verbal 0:16:50.280 --> 0:16:53.800 message on that phone call that says, we didn't do 0:16:53.840 --> 0:16:55.280 as well as we thought we were going to do 0:16:55.360 --> 0:16:59.240 last quarter. Uh, that's probably going to affect the share price. 0:16:59.600 --> 0:17:02.600 And I thought you should know, I do not get 0:17:02.600 --> 0:17:06.920 a phone call as as average investor, you know, average Joe, 0:17:06.960 --> 0:17:09.040 the the American investor. I don't get a phone call. 0:17:09.119 --> 0:17:12.359 So when the stock goes on the floor and it 0:17:12.440 --> 0:17:14.760 opens up for trading, I jump out and I buy 0:17:14.760 --> 0:17:18.400 it at thirty eight dollars a share. Meanwhile, the multibillion 0:17:18.480 --> 0:17:23.760 dollar bank industry does not jump in because they already 0:17:23.760 --> 0:17:26.679 has the foe knowledge, knowing that that price does not 0:17:26.800 --> 0:17:29.400 truly reflect the value of the company as it stands 0:17:29.440 --> 0:17:34.840 based upon those last quarter results. The stock price for 0:17:35.960 --> 0:17:39.520 Facebook fell as low as down to thirty one dollars, 0:17:39.520 --> 0:17:41.400 and like I said at the beginning of this podcast, 0:17:41.480 --> 0:17:44.600 as of the recording of this it's currently at thirty 0:17:44.600 --> 0:17:48.080 two dollars and um in like six cents, which is 0:17:48.160 --> 0:17:51.639 significantly lower than thirty eight dollars per share, So people, 0:17:51.880 --> 0:17:54.080 the average investors were hurt by this. You know, they 0:17:54.080 --> 0:17:56.119 went out and they bought it at full price, thinking 0:17:56.160 --> 0:18:00.760 that that was a valid valuation or the company it 0:18:00.880 --> 0:18:04.760 was approved, it was ready to go and everything's cool. Meanwhile, 0:18:04.840 --> 0:18:08.320 all these companies that were in the no adjusted their 0:18:08.480 --> 0:18:12.560 figures for what Facebook's results would be and what they're 0:18:12.560 --> 0:18:16.000 projected results would be in the future and did not 0:18:16.240 --> 0:18:18.680 jump into it. So that caused a lot of people 0:18:18.720 --> 0:18:23.720 to cry foul, saying this isn't fair. Facebook. Let these 0:18:23.760 --> 0:18:28.560 big companies know, these big banks mainly no financial institutions 0:18:28.560 --> 0:18:31.480 know that things were not quite as they seemed. But 0:18:31.480 --> 0:18:34.000 they didn't let us know. And as a result, we've 0:18:34.040 --> 0:18:38.240 lost money. Uh, while we were trading in good faith. 0:18:38.760 --> 0:18:43.199 And uh, here's the thing. Facebook was allowed and I 0:18:43.280 --> 0:18:47.880 p O is allowed to give verbal information like that 0:18:48.480 --> 0:18:52.840 to major investors that there's nothing wrong with that as 0:18:52.920 --> 0:18:56.200 the law stands in the United States, and there's nothing 0:18:56.320 --> 0:19:01.040 that requires Facebook to make that aim statement in any 0:19:01.080 --> 0:19:06.760 other format to anyone else besides those investors. So based 0:19:06.800 --> 0:19:11.000 on a strict legal definition on that approach, it's you know, 0:19:11.080 --> 0:19:14.920 Facebook quote unquote did nothing wrong. Now wrong in ethical 0:19:15.200 --> 0:19:16.920 like wrong in the eyes of the law and wrong 0:19:16.920 --> 0:19:19.520 in the eyes of ethics are two different things. You know, 0:19:19.680 --> 0:19:22.480 a law does not have to necessarily be ethical just 0:19:22.520 --> 0:19:25.840 because it's just because it's not illegal, doesn't mean it's 0:19:25.880 --> 0:19:28.760 the right thing to do right right exactly, just like 0:19:29.040 --> 0:19:33.040 breaking certain laws may not break ethics, not that you 0:19:33.080 --> 0:19:37.359 should break the law. Obey the lawheads, so go to school. 0:19:37.520 --> 0:19:44.439 This has uh inspired several investors to get together and 0:19:45.080 --> 0:19:47.959 sue Facebook. As a result, there are more than one 0:19:48.000 --> 0:19:51.399 lawsuit now class action lawsuits. So it's a law of 0:19:51.480 --> 0:19:53.680 The lawsuit was filed in the U. S. District Court 0:19:53.720 --> 0:19:59.320 in Manhattan. Uh and UH, it's essentially saying that Facebook 0:19:59.400 --> 0:20:04.480 told analysts at its underwriters, which were those financial institutions, 0:20:04.640 --> 0:20:11.879 to materially lower their revenue forecasts for so that you know, 0:20:11.960 --> 0:20:14.119 that's the essentially saying the company is not going to 0:20:14.200 --> 0:20:16.760 make as much money in twelve as we originally thought 0:20:16.760 --> 0:20:20.120 we were going to, and that without letting that information 0:20:20.200 --> 0:20:22.840 go out to the public, it was running kind of 0:20:22.880 --> 0:20:29.240 a shell game and distracting us while letting us buy shares. 0:20:29.600 --> 0:20:33.359 Us being the average Joe American um buy shares at 0:20:33.359 --> 0:20:36.240 full price. I want to correct something I said. UM, 0:20:36.480 --> 0:20:39.040 they're looking, they're hoping to make a class action. They 0:20:39.119 --> 0:20:43.359 haven't yet as far as the recording of the show. UM. 0:20:43.400 --> 0:20:46.959 And also at the same time, the Massachusetts Security Division 0:20:46.960 --> 0:20:52.200 has subpoena at Morgan Stanley about the communications with clients 0:20:52.840 --> 0:20:57.080 about this UM these adjusted forecasts. So really the train 0:20:57.119 --> 0:21:00.720 of events is that, of course, if these allegations are true, 0:21:01.080 --> 0:21:04.240 If the allegations are true, what happened is Facebook executive 0:21:04.320 --> 0:21:10.080 goes and tells financial institutions, including Morgan Stanley, our forecasts 0:21:10.119 --> 0:21:13.760 for Facebook's revenues in are off. We're not gonna make them. 0:21:13.840 --> 0:21:16.920 We're not gonna make that much money. Morgan Stanley then 0:21:17.000 --> 0:21:22.320 goes and tells major investors that are customers for Morgan Stanley, Hey, 0:21:22.440 --> 0:21:24.400 Facebook is not going to make its numbers this year. 0:21:24.960 --> 0:21:28.800 The price that we're being quoted is probably not indicative 0:21:28.840 --> 0:21:31.760 of its actual value. You may not want to invest. 0:21:32.760 --> 0:21:36.239 And meanwhile, everyone else on the street is trying to 0:21:36.280 --> 0:21:38.600 get that thirty eight dollars share of thinking that Facebook 0:21:38.640 --> 0:21:42.640 shares are going to go through the roof. Now that 0:21:43.200 --> 0:21:48.560 sums up the big scandal. There's some other things that 0:21:48.600 --> 0:21:50.840 I think would be interesting to talk about that relate 0:21:50.960 --> 0:21:55.040 to Facebook going public and Facebook way Facebook generates revenue, 0:21:55.600 --> 0:21:59.080 and some of the challenges that the company faces. So 0:21:59.200 --> 0:22:03.480 let's say that the company whether's the storm and whether 0:22:03.640 --> 0:22:05.879 or not it means that they have to do a 0:22:05.880 --> 0:22:09.119 settlement of court or they win whatever. They get through this. 0:22:09.800 --> 0:22:12.760 So there's a particularly rocky I p O. But it 0:22:12.840 --> 0:22:15.000 was also a very large one, and there were other 0:22:15.160 --> 0:22:18.840 mitigating factors that kind of confused it. So they get 0:22:18.880 --> 0:22:21.960 through that, where do they go from here? That's actually 0:22:22.000 --> 0:22:28.280 a really interesting question because Facebook, according to uh to 0:22:28.560 --> 0:22:34.440 an article I read, Facebook makes around of its revenue 0:22:34.680 --> 0:22:39.560 from web advertising, So the majority of money coming into 0:22:39.560 --> 0:22:43.800 Facebook comes in through web advertising. That's uh. That's both 0:22:43.800 --> 0:22:45.679 a good and a bad thing. It's good in the 0:22:45.720 --> 0:22:50.520 sense that Facebook has an enormous customer base or enormous 0:22:50.600 --> 0:22:54.600 user base. I guess you could say, uh, nine million users. 0:22:54.600 --> 0:22:57.119 That's a lot of people, just under a billion people, 0:22:57.119 --> 0:22:59.119 probably gonna hit more than a billion before the end 0:22:59.160 --> 0:23:04.200 of Yeah, so you've got just under a billion people 0:23:04.560 --> 0:23:06.880 using your service. That's a lot of eyeballs to get 0:23:06.880 --> 0:23:11.680 to see these ads. However, the value of web advertising 0:23:11.760 --> 0:23:16.160 as a whole is in decline. And particularly on Facebook, 0:23:16.440 --> 0:23:23.200 where Facebook has tons of information about user behavior on 0:23:23.200 --> 0:23:27.639 Facebook and not that many Facebook users are actually visiting 0:23:27.680 --> 0:23:31.359 the ads that are served up on their pages, which 0:23:31.400 --> 0:23:36.280 is another one of those indicators that people actually were 0:23:36.280 --> 0:23:40.639 saying in the days before, immediately before the initial public offering, 0:23:40.680 --> 0:23:45.480 that wouldn't matter that much. But in hindsight it kind 0:23:45.480 --> 0:23:51.359 of was a a small flag. UH General Motors, the 0:23:51.520 --> 0:23:56.480 UH American automaker, had decided to pull its advertising from Facebook, 0:23:56.520 --> 0:24:00.119 saying it wasn't particularly effective. Um, that didn't really he 0:24:00.160 --> 0:24:04.919 seemed to dampen enthusiasm for the stock by itself, but 0:24:05.040 --> 0:24:09.320 it could have been an indicator that something is wrong. 0:24:09.960 --> 0:24:12.320 And you know, I mean they they are one of 0:24:12.320 --> 0:24:14.960 the biggest companies in the world, even after the what 0:24:15.119 --> 0:24:18.879 some people are calling the Great Recession. Um, you know 0:24:19.000 --> 0:24:22.879 that that's if they don't believe that advertising on Facebook 0:24:22.920 --> 0:24:26.879 is going to be effective, then you know that that 0:24:27.040 --> 0:24:29.679 is a sign to investors said, hey, they may not 0:24:29.760 --> 0:24:32.520 be able to make their money. Now they were only 0:24:32.560 --> 0:24:36.560 one very large company to have done that immediately preceding 0:24:36.600 --> 0:24:39.439 the I p O. But you know, it's it's one 0:24:39.480 --> 0:24:42.760 of those pieces that in again in hindsight, looking back 0:24:42.800 --> 0:24:45.720 on it, you might have said, you know that that 0:24:45.800 --> 0:24:48.520