The Facebook IPO could be one of the biggest opening flops in stock market history. What many people believe should have been an opportunity to rekindle popular interest in stocks has fueled public concerns about how the stock market works.

Investors began to back away after reports of insider trading and concerns about the company’s future prospects surfaced. By the third day of trading, the stock had fallen more than 18 percent from the initial offering.

It has been reported that wealthy clients and big investors received warnings that the company’s financial outlook had weakened, but the news failed to reach retail investors.

In the initial offering, retail investors purchased approximately 25 percent of Facebook’s 421 million shares. The total value dropped more than $500 million by May 24.

"This has proved the game is rigged," Charles Geisst, a finance professor and Wall Street historian at Manhattan College told the Chicago Tribune . "There’s just too many questions about the integrity of the stock market , and I think people are starting to realize this — individuals, at least."

Regulators are investigating to determine what went wrong and are looking into information that was shared before the IPO. According to the Chicago Tribune , Morgan Stanley is among the underwriters who shared concerns about the company’s earnings with privileged clients, but failed to disclose the information with the public and retail investors.

So far, securities experts say it is not clear whether Facebook’s underwriters broke any rules, but selective disclosures could be a violation of the state’s financial fraud laws. One of an underwriter’s fiduciary duties is to be honest to the public.

"Market theory is very simple," said Eliot Spitzer. "You can’t give false and misleading material information to people, where you know it’s false and you correct it only to some but not to others."

Large institutions are powerful profit drivers for Wall Street firms, and in order to keep them as clients, they sometimes give them inside information. When information is withheld from the public, this could be a form of stock fraud .

"The small guy is not getting a fair shot in the market," Spitzer said. "That unfortunately has been true for too many years."

Source: Chicago Tribune

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