CEO Gaffe of the Week: Facebook, Nasdaq, and Morgan Stanley
This year I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!
This week I'm going to break from tradition and highlight not one, but three CEOs who all deserve a wag of my finger following last week's carnival-like debut of Facebook (NAS: FB) . Those CEOs are Mark Zuckerberg of Facebook, Robert Greifeld of Nasdaq OMX Group (NAS: NDAQ) , and James Gorman of Morgan Stanley (NYS: MS) .
The dunce cap(s)
It was like watching a modern-day Three Stooges last week as one error after another was committed, leading Facebook to fall significantly off its highs and erasing billions in market value.
To start we had Nasdaq's failure to launch -- literally. Nasdaq's failure to reconcile buy and sell orders delayed Facebook's open by 30 minutes and wrought chaos throughout countless brokerage firms, which took days to reconcile trades for their customers. Over the weekend, CEO Robert Greifeld issued an apology on behalf of the Nasdaq OMX, saying, "This was not our finest hour." Unsurprisingly, this callous statement and the paltry $13 million the company has put aside to compensate investors who were the victims of last Friday's wonky trading may not be enough, as the lawsuits have already begun to roll in.
Then we have Mr. Zuckerberg's role, which might seem moot at first, but was in fact a key factor in Facebook's botched IPO. There are two aspects in particular that contributed to the massive mishap.
First, Facebook insiders chose to sell a ridiculous amount of their shares relative to the last major Internet-related IPO, Google (NAS: GOOG) . When Google went public, insiders dumped 28% of their shares. Facebook insiders, on the other hand, sold 57% of their shares on Friday. But the biggest gaffe of all could be Zuckerberg's insistence that Facebook boost the amount of shares sold by 25%, on top of his attempt, reported by The Wall Street Journal, to raise the IPO offering price as late as Thursday at the behest of the underwriters. The underwriters, not Zuckerberg, are in place to judge investors' ability to absorb shares, yet it appears he was unwilling to listen.
To the corner -- all of you!
But wait -- there's more!
I actually saved the best for last, because it wasn't until later in the week that the full magnitude of Morgan Stanley's megagaffe became apparent. Morgan Stanley, the lead underwriter for the Facebook IPO, committed two no-nos. First, Morgan Stanley consumer Internet analyst Scott Devitt lowered his revenue forecasts for Facebook literally hours before the company went public. Yes, Facebook's S-1 prospectus from May 9 may have used more moderate growth language than it had before, but one day before the IPO? Seriously?
The second potential goof is currently under investigation by securities regulators, and it involves whether this negative information was only shared with a select group of institutional investors and not others. A violation would potentially fall under the scope of the Securities and Exchange Commission, as well as the Financial Industry Regulatory Authority. And where has CEO James Gorman been during this debacle? Completely absent.
Not bad for its first week of being listed, right
I'm not sure whether I'd dub this the perfect storm, but Facebook is currently on track to be the biggest IPO flop in recent memory, with all three CEOs taking the blame.
If the Facebook IPO has taught us anything, it's that not all social-media companies are automatic buys. Zynga (NAS: ZNGA) shareholders, for instance, have learned that the hard way. With more than 90% of its revenue tied to Facebook, Zynga shares are now well below their IPO price.
Facebook, we really do need a "dislike" button for last week's fiasco.
Do you have a CEO you'd like to nominate for this dubious weekly honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may see your nominee in the spotlight.
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He is merciless when it comes to poking fun at dubious CEO antics. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never wears a dunce cap.
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