SEC Sleeps Through the Zuckerberg Big Lie

June 16th, 2012
in contributors

by Andrew Butter

There are two main elements to the litigation about the IPO. The first is about how last-minute-second-thoughts about the future earnings by an analyst should zuckerberg-in-front-of-chartSMALLhave been widely “shared”.  It’s not a strong case, much of the communication was verbal and analysts change their minds all time. Sloppy management, yes…once the prospectus was up everyone should have shut up, but it will be hard to prove wrongdoing.

The other issue doesn’t have the headlines, but it goes to the core of how the sellers of shares got $16 billion and two weeks later those shares are worth $12 billion to the suckers who bought them. OK so the suckers got screwed, that’s how it works in the real world.  Well…up to a point.

Follow up:

Section 11 of the Securities Act, makes it a violation to publish incorrect or incomplete information, even if unintentional. That means if something was false or information was incomplete, even if a moronic idiot should have known it was false, then you broke the law.

How about this for misinformation:


Remember, the people who lost $4 billion in the last two weeks were mainly unsophisticated investors egged on by pathetically unsophisticated mainstream media financial pundits…none of whom stood up prior to the IPO and said this is a crock of horse manure. You would have thought that with the “Biggest IPO ever” at least one of the incompetents would have said “be careful”….or perhaps they were taking kickbacks?  So much for freedom of the press!

The suckers look at a chart like that and they say…”Ooh WOW, this is my lucky-day…in 2017 Facebook’s revenues will exceed the GDP of the whole world…where can I buy?!!!”

Nice graphic, nice idea, upbeat-driven visionary talking about his impossible targets, but the reality is that is just not possible.  Zuckerberg is not an idiot; he knew that chart was a big lie, so did the investment banks managing the issue.

What investors were conspicuously not shown in between the smoke and mirrors was Zuckerberg’s chart compared to the market for advertising, which up to now is Facebook’s core business, and there was no suggestion that might change.


It should not be hard for a smart lawyer to convince a not-very-smart jury, that sort of information should have been provided in the prospectus. The fact it wasn’t meant that the prospectus was incomplete. Not that the SEC seem to care any more than they cared when Made-Off was paying out 15% a year on his hedge fund, without any rational explanation of how he achieved that.

If that chart had been put up in the Road-Show then Zuckerberg could have stood in front of the crowd and explained which sectors he was aiming to demolish like Google and the Internet in general demolished newspapers (and radio – not shown)….but he would have had a hard time doing that, once all the information was in place.

The simple fact of life is that advertising revenues in total are 2.3% plus or minus 0.1% of nominal GDP, that’s the cake everyone has to share, and no one can realistically hope to eat the whole cake, particularly when right now they got 2%. By the way the “Fundamental” lines are based on nominal GDP, notice what a good fit television is, and how much newspapers were hammered.

The risks that Facebook will not be able to achieve that level of market penetration should also have been properly presented, in the section on “Risks investors should know about”, they were not.

The fact that any competent market analyst could have put that chart together in twenty minutes, counts for nothing in Facebook’s defence. In the event, even the hot-shot financial journalists were fooled by the hype and the misinformation, if they were fooled, how about ordinary unsophisticated investors that the system is supposed to protect…from fraudsters?

There were only two analysts who published anything saying Facebook was hugely over-priced prior to the IPO….as in write down on a piece of paper in plain English and put that up in the public view so you can find it using an internet search, saying…“Facebook is not worth anything like $100 billion”, and they were both in what the mainstream press calls the lunatic fringe.

The clear intent of Section 11 is that investors in public companies should be told stuff that they need to know in order to make a rational investment decision. That clearly did not happen. Projections, are an important part of what investors need to know, that’s how you can do the valuations.

And another thing, the implicit story-line in the prospectus and the road-show, was that revenues would track the market leader, in this case Google. That should have been clearly communicated, it wasn’t; instead it was left to a load of winks and half-sentences.

Anyone who remembers the IPO frenzy of the Dot.Com bubble, knows that line is a crock of horse manure.

This is it for U.S.A.:


Leading up to the NASDAQ bubble, the world was full of internet or whatever type-companies, who would put an exponential chart up on the wall as their business model, and say “well if Microsoft could do it so can we”.

That’s exactly the same story-line that Facebook put out. But Microsoft was in the selling software to the market of putting a PC on everyone’s desk, and effectively they had a monopoly. Facebook is in the advertising business, and they don’t have a monopoly…on advertising.

It was irresponsible and deceptive of Zuckerberg to put an exponential curve up to show investors. 

All companies, Microsoft and Google included, grow by an S-Curve or a series of S-Curves. 

Perhaps in the euphoria of starting a hugely successful company Zuckerberg didn’t understand that. But his minders, the investment banks, should have explained there is a fine line between the unbounded optimism which has driven his company to achieve extraordinary things, and the obligations of the head of a public company, to tell investors the whole story, warts and all.

It’s all very well to laugh at the investors who got suckered by the story, anyone who “managed” to buy at $44 lost nearly half their bet, and it’s not coming back.

But that’s a big part of the problem of what’s wrong with Wall Street. The SEC should lodge a case themselves, and hammer the investment banks who allowed that crock of horse manure to be put out as a prospectus…that’s their job.

Related Articles

Investing articles about Facebook

What Really Happened with Facebook’s IPO? by John Lounsbury at Investing Daily 21 May 2012

Investing articles by Andrew Butter

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1 comment

  1. Taymere says :

    It's amazing what speculators will pay for "growth". Valuations constantly amaze. I recently bought RSH for $4.12, a boringly profitable company that wall street spits on. David Dreman has a chapter entitled "Paying through the nose for growth" in his book. Give me boringly profitable any day.

    Your second chart, "US Ad revenue" reminds me of another story, that of GCI. During the financial crisis everyone said that GCI was dead,a good company in a dying industry but like RSH, GCI had a strong balance sheet, and went on to become a 10x bagger off of the 2009 lows (unfortunately I didn't trade it, I watched from the sidelines). I see a lot of parallels between RSH now and GCI in 2009. Wall Street has written RSH off for dead, the story is that low margin smart phones combining 5 previously high margin separate devices into one low margin device will kill RSH. Such a new existential threat is similar to the threat that GCI faced from the internet and GCI survived, it's still printing newspapers with it's iconic "USA Today" brand name and strong balance sheet. Survival and profitability are boring stories but I like boring 10x baggers.



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