Harrop: ‘Dumb money’ for dummies and Facebook
In the beginning, there was pump and dump. In the dot-com bubble of the late ’90s, the stock-analyzing arms of investment banks would pump up a new stock’s price with rave reviews. The banker arm underwriting the new stock issue would sit back, watch the price explode and then dump it – as would their favored customers. The folks who fell for the hype and bought in at inflated prices were the little investors, also known as “dumb money.”
This scheme was deemed unfair to ordinary investors, so a reform was put in place that appeared to require analysts to keep their mouths shut before an initial public offering. It forbade analysts to publish written reports – be they on paper or electronic – containing new information about the company. Notably absent was any mention of telephones.
Then comes along the fantabulous Facebook stock offering and ensuing fallout. Suspicions are high that a select few were told about Facebook’s recently disappointing revenues, which might not justify the initial public offering price of $38. They got out the minute they could, or they sold the stock short or made other bets the stock price would fall. The Securities and Exchange Commission is looking into the matter. And a shareholder class-action suit has been filed. Meanwhile, if the conversations about Facebook’s revenues were done by telephone or over cocktails, it is unclear that anyone broke the law.
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