Facebook IPO-- How Else Is Wall Street Ripping You Off?

My friend Steve called me on the day Facebook went public to brag how lucky he was that his broker got him 1,000 shares of the IPO. "Steve, you've been asking my advice about your investments for almost 3 decades. Why didn't you ask me about this before you bought it? You just got fleeced." He had put $38,000 into Facebook. His investment/gamble was worth $38,230 at the end of the day and I told him to sell it immediately. He told me he would be a loser if he did because of the broker's commission in and the broker's commission out. I told him he'd lose a lot more if he stayed in. He ignored my advice. His $38,000 bet is now worth $21,710 (not counting the commission he paid for the bad advice or the commission he will eventually pay to get out of it). And Steve wasn't my only friend who got taken to the cleaners by his broker on this deal. Some of my friends look at the bright side: "I needed a good tax write-off anyway." Do you think "taken to the cleaners by his broker" is too strong a term to use? Let me tell you why it isn't.

The manufactured hype around the IPO was breathtaking-- brilliant... and devious. It was a classic "pump and dump" scheme and the underwriters were sharing inside information with favored clients but not with the public, which is illegal. Wall Street's most ridiculous shills, like Arvind Bhatia from Strene Agee predicted absurdly high prices for the shares and the consensus in the Wall Street shill universe is that he was absurdly low! Jim Krapfel of Morningstar came close to saying that a 50% rise on the first day was in the bag. Not a single analyst predicted the obvious-- that the stock was way overvalued. The market capitalization was set at $104 billion ($38/share), which should have been a gigantic red flag for anyone paying attention. And even if civilians had no way of knowing how absurd that was, financial professionals-- or even semi-professionals-- should have. And many did. But there was a lot of money to be made by playing along. Morgan Stanley and other Wall Street operations that stood to make a fortune-- and are now being sued for fraud-- created a phony baloney demand for the stock by telling everyone that there number of shares was strictly limited and made it appear to gullible retail investors that if their beloved broker could get them in on this great deal, he was doing them a huge favor. My 3 financial advisors alerted me about the same as soon as Morgan Stanley announced on May 16, two days before D-Day, that 25% more shares were available than had been announced-- and that meant that every firm that had ordered astronomical numbers for clients clamoring unsuccessfully to get some (or to get more) had to buy them now. And that means they had to pass what they now realized was almost definitely going to be a stiff on to their clients.

I heard from at least half a dozen friends who told me the conversation with their broker started with, "I have great news for you." By that point, two days before D-Day, the brokers were desperate to move the shares they had been forced to take. Insiders, like Goldman Sachs, couldn't wait to sell. Like Morgan Stanley and JP Morgan, Goldman is now the subject of multiple law suits.

Another of my friends, Curtis, was so furious at his broker-- of 3 decades-- that he decided to hire a forensic auditor to see where else along the way he was cheated. And thanks to the new rules-- which were opposed every inch of the way by Wall Street with millions of dollars in bribes to conservatives in Congress-- even without the auditor he was able to find thousands and thousands of dollars in excessive fees and commissions that were charged to his account over the years. How about your brokerage account? Have you checked it? Do it before Romney gets in. He's sworn to repeal the consumer protection act that forces predatory banksters to disclose hidden fees and other charges they use to routinely rip off their customers.