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Are Retail Investors Getting Hustled on Facebook?

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You've got to hand it to the guys at Morgan Stanley, Goldman Sachs and JPMorgan who have been running the Facebook initial public offering.

They've orchestrated a nearly perfect IPO performance.

The huge public roadshow performances. The price targets that keep moving higher as we get closer to the Facebook IPO. Leaks that even the new targets may be too low. The size of the IPO growing 25 percent. Even a reminder that new market rules restrict so-called "market orders" — basically, instructions to your broker to buy Facebook shares at any price necessary — paints a picture of a feeding frenzy for the stock.

That picture would be largely accurate.

One financial adviser at a major Wall Street brokerage told me that his retail clients “won’t take no for an answer” when it comes to Facebook. He’s been telling them to stay away from the stock for the first few weeks of trading, but many of his clients insist on placing orders to buy on the first day.

“Interest is very high. We expect a lot of orders at the open,” a financial advisor at one of the biggest U.S. brokerages said.

A Bank of America Merrill Lynch broker said that his managers were concerned about possible backlash from clients if the stock drops after an initial spike. As a result, they’ve been explicitly warning retail clients about the potential for extreme volatility when the stock opens for trading.

“Everyone remembers how the dot-com crash sent investors into the wilderness for years. We don’t want this one stock to spook people out of the market,” he said.

But while the small fish may be churning the waters to get a bite at Facebook, the sharks are quietly hanging back.

Goldman Sachs had planned to sell around a quarter of its stake in the company. Now it aims to sell half. The hedge fund Tiger Global was aiming to sell 7 percent of its stake; now it is selling 50 percent. Accel Partners’ plans to sell rose from 22 percent to 28 percent. Venture capitalist Peter Thiel went from selling 20 percent of his shares to 50 percent.

At the Ira Sohn conference yesterday, some of the biggest hedge-fund managers expressed skepticism about Facebook in private conversations.

“The order book is extraordinarily strong. I don’t understand it,” one very well-known manager said, speaking on the condition that he not be named.

Another well-known manager said he believed Facebook has a lot of potential but that the price had shot up too far:

“Their growth was flat last quarter. How do you justify the multiple they’re getting with growth like that?” he said. (I’m not sure he knew I was a reporter when he made this comment, so I’m not going to name him. He was one of the most anticipated speakers at the conference.)

No one at Ira Sohn expressed enthusiasm for Facebook. Earlier this week, I reported that the big Wall Street guys at the Robin Hood Foundation charity gala were also underwhelmed about the prospect of buying shares in the social network.

Of course, it’s not just retail investors who are eager to buy Facebook. Most of the shares available in the IPO will go to large institutional investors. They are the ones who keep telling the investment bankers that they’re willing to pay more and more for the shares. And Facebook’s insiders, including Mark Zuckerberg, are not increasing the size of the stakes they are selling.

Yet when Goldman Sachs and the venture capitalists appear to be eager to significantly reduce their stakes in Facebook, you have to wonder: what do they know that the rest of us don’t?

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