Looking for a Level Playing Field

There are investors, and then there are investors, and if you need to ask which group you're in, you're not with the big boys (neither am I), and it's not even close to being a level playing field.

The news about the Facebook IPO has been unrelentingly bad, from the Nasdaq snafus that delayed initial trading to the stock's non-existent opening "bump" to the current allegations of unfair play.

To date, to be clear, no one at Facebook or at its lead underwriters (Morgan Stanley, Goldman Sachs, and JP Morgan) has been charged with any illegal behavior. But at very best, it's grossly unfair behavior.

Here's what happened, according to Henry Blodget's Business Insider blog, the Wall Street Journal's Gina Chon, Jenny Strasburg, and Anupreeta Das (article here; subscription required), Evelyn M. Rusli, Ben Protess, and Michael J. De La Merced at the New York Times' "DealBook" blog, and others:

A Facebook executive (or executives) told the underwriters' analysts that its second quarter results would fall short of the analysts' previous estimates. That information was conveyed to larger institutional investors, but not to everyone.

As Blodget writes, "The estimate cut appears to have influenced the investment decisions of at least some institutional investors, dampening their appetite for Facebook stock, and crucially, affecting the price at which they were willing to buy Facebook stock."

He goes on to term this uneven sharing of information as, "at best ... grossly unfair". At worst? It's "a violation of securities laws."

As the Times reporters note, "Under securities rules, a soon-to-be public company is permitted to provide “material” information to research analysts. But if that data is inconsistent with the company’s public prospectus, the issuer must revise the regulatory filing."

The Securities and Exchange Commission has apparently opened an inquiry, and Congress may do the same. While these investigations may well show that no laws have been broken -- just "business as usual" -- it makes it clearer than ever that the institutional investors operate with advantages that retail investors can never match.

If it's not illegal, it still stinks.