Insider Trading by Facebook and Goldman Sachs: Implications for New Zealand
Learning that Goldman Sachs is being sued for insider trading for their role in misleading investors about Facebook’s initial public offering (IPO) is raising a lot of red flags here in New Zealand. Goldman Sachs is one of three investment banks New Zealand’s National government has chosen to manage the IPO of our publicly owned energy companies and Air New Zealand.
Just to be clear: insider trading is a federal crime the US. However given Obama’s extremely poor track record when it comes to prosecuting investment banks, the move by Facebook investors to file civil lawsuits against Facebook CEO Mark Zuckerberg and the banks who managed the IPO was a good call. It has prompted the state of Massachusetts, the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the U.S. Senate Banking Committee and the House Financial Services Committee to launch investigations. In addition Morgan Stanley, one of the investment banks being sued, has announced that it will reimburse “some” investors who were ripped off by the insider trading. But according to analysts StarMine, Facebook shares are still overvalued and the stock price could drop as low as $9.59 a share (see Facebook IPO).
Why Facebook and Their Bankster Friends Are Being Sued
US mainstream coverage of this high profile crime has been somewhat sketchy. For example, most reports refer to the banks being sued as “Morgan Stanley and others.” You have to read the business or international press to learn that Goldman Sachs and JP Morgan, as well several smaller banks, were also among the perps. The reason Facebook et al are being sued and investigated is that they shared information about an anticipated drop in Facebook revenue growth with “insiders” (Facebook and institutional investors), but not with the general public. As a result public investors lost more than $2 billion when Facebook stock lost more than 17% of its original value ($38 per share) in its first day of trading. The Nasdaq exchange is also being sued, as much of this drop occurred in the first 17 seconds of trading, when Nasdaq software malfunctioned and investors were unable to buy, sell or cancel trades. (Facebook investor sues Nasdaq).
In my view, Goldman Sachs is a particularly important player in this debacle. Goldman Sachs and funds they manage already owned $850 million in Facebook shares. They sold 28.7 of their 65.9 million shares at $38 per share for $1.9 million. According to my calculations, that works out to approximately 500% profit.
Public Opposition to the Privatization of State-Owned Assets
Even before this latest scandal broke, a lot of New Zealanders were really unhappy about our government’s plan to pay Goldman Sachs and two other investment banks $150 to manage the IPO of “a partial sale” of five of our state owned companies (see Oral Questions to Ministers). A lot of people view the decision to privatize our extremely profitable state owned energy companies as “ideological” (i.e. benefiting investment trusts and wealthy New Zealanders who are Prime Minister John Key’s major backers). Key himself is a former investment banker and a former member of the New York Federal Reserve (NZ Parliament John Key).
It sure makes no economic sense to sell companies providing an average 7.6% return to New Zealand taxpayers – at least not when the cost of overseas borrowing is 4-5%.(see 10 myths about asset sales). A recent study shows that past privatization of publicly owned companies by the Labour government made the New Zealand economy worse off. Not only did the loss of revenue necessitate an increase in overseas borrowing, but ever since these companies wound up in foreign hands, there has been a steady loss of our country’s wealth in profit/dividend transfers to foreign investors (see Ganesh Nana study).
Organized Opposition to Asset Sales
There is a particularly strong opposition to the asset sales in the Maori community, which they feel violate the Treaty of Waitangi some of their chiefs signed with the British in 1840. The New Zealand Maori Council has filed a legal challenge with the Waitangi Tribunal.
On May 12th, a coalition of other groups (Grey Power, the New Zealand Council of Trade Unions (CTU), the Labour Party and the Green Party) launched a petition demanding a Citizens Initiated Referendum on state assets sales. As a member of both Grey Power and the Green Party, I’ve been out in the streets nearly everyday collecting signatures. Nearly everyone I approach signs. They already know the people who run Goldman Sachs are crooks – and don’t want them anywhere near our public utilities or Air New Zealand.
Hall of Shame
Below is a list of the Facebook inside traders who cashed in big by selling their shares before the stock price plummeted:
Mark Zuckerberg, Facebook CEO
Shares sold: 30.2 million
Value: $1.13 billion
Accel Partners, venture capital investor
Year invested in Facebook: 2005 for $12.7 million
Shares sold: 49 million
Value: $1.86 billion
Peter Thiel, PayPal co-founder
Year invested in Facebook: 2004 for $500,000
Shares sold: 16.8 million
Value: $640 million
DST Global Ltd, investment firm based in London and founded by Russian oligarch
Year invested in Facebook: 2009 and late 2010 for $200 million
Shares sold: 45.7 million
Value: $1.74 billion
Goldman Sachs, investment bank
Year invested in Facebook: 2011 for $450 million
Shares sold: 28.7 million
Value: $1.09 billion
Elevation Partners, private equity firm with Bono as spokesman
Shares sold: 4.6 million
Value: $176 million
Greylock Partners, venture capital investor
Year invested in Facebook: 2006 for $27.5 million
Shares sold: 7.6 million
Value: $289 millionShare and Enjoy: