Facebook Funds: The Biggest Scam Running
- Joshua M Brown
- May 8th, 2012
If you have a working telephone and an affluent zip code, you have likely been getting all kinds of calls from brokers over the years, but none so insidious as the one I’m about to reveal.
The bucket shops in lower Manhattan, northern New Jersey and Long Island simply couldn’t watch the Facebook & social media IPO desperation blood orgy from the sidelines without springing into action. Brokers have a NASA-calibrated schmuck-seeking radar and it hasn’t set off this many schmuck alarms since the aftermath of the Netscape deal in the mid-90′s.
The frenzy for the Facebook debut is a target to fire at the size of Mike and Molly‘s haunches laid end to end and believe me, the brokers want to hit that target hard. “It’s a fuckin’ layup,” I’ve been told by a few of my former colleagues, “as soon as they hear the word Facebook it’s a done deal, I’m getting their social security numbers.”
So here’s how it’s going down…
For the past 9 months, low-rent broker-dealers have been accumulating shares of Facebook and Twitter from the fringes of the employee pool of these companies. Some are free-trading but most are 144 insider shares (which cannot be sold right away). They’ve created private funds to hold these shares, named them, packaged them and set them up as Reg D vehicles. They’ve exhaustively beaten the story into their sales forces, gotten the brokers all hopped up on promises of large inside commissions (the kind the clients don’t see) and the potential to “become monster producers” as a result of what these IPOs will do upon launch – “your clients are going to make MULTIPLES on their money!”
What they’ve not explained in great detail to the “kids in suits” who are being mobilized to sell this shit is that their clients aren’t actually getting pre-IPO shares. What they’re getting instead is shares in a fund that may or may not hold a good amount of these shares. The funds are loaded with all kinds of contingencies and miscellaneous fees and caveats. They are also able to do whatever they want with the money raised, including taking shots on other venture deals that sound social media-y enough to qualify. The PPMs (private placement memorandums) are written so as to protect the firm from everything and anything that could go wrong (and it will all go wrong). The money is being held in escrow and the clients are signing their lives away.
Making a deal with the devil is child’s play compared to doing principle business off-exchange with a third-tier boiler room brokerage firm.
And you know who’s on the other end of that phone – guys like this:
From the Gryphon Financial Group’s website (prior to their arrests, I kid you not):
The Wolf begins to circle, claws of black steel, a beast approaches, fur as dark as night, eyes glowing red, fangs from the pit of hell itself. The Giant Wolf sniffing, savoring the scent of the meat to come – its not fear that grips them, only heightened sense of things and the anticipation of millions to be made.
Financial Times Reports – this secret group has identified as the latest hedge fund to exploit the weakening sub prime markets – pounding stocks down to nothing and making billions along the way, one hedge fund run by this group had been rammed to see returns of over 1000% in 2007. Together we beat up hedge funds that are said to have realized over 20 million from one trade.
Anyway, I gave people the heads up about these sales pitches last month on Max Keiser’s show and my pal Kyle wrote it up for Benzinga this morning:
Finally, Brown warned against the dangers of shady brokerage firms who have “figured out a way to buy shares from Twitter and Facebook (NASDAQ: FB) employees who need liquidity.”
“They’re taking these shares, they’re bundling them in these private funds with escrow accounts,” said Brown. “They’re layering it with fees on top of it, and these are restricted shares of stock. They’re selling it to people as though they’re buying pre-IPO shares in Facebook, when in reality what they’re really buying is shares of a fund that owns stock that may or may not be sold at some point.
“It is probably the biggest scam going on right now. People are cold calling investors with this thing. I think everyone needs to be on their guard. If somebody calls you up and offers pre-IPO shares of Facebook at a discount, it’s a lie, they don’t have them, they won’t give them to you, you are about to be screwed. Do not trust anyone that has something that’s too good to be true.”
The bottom line, as we race toward the Facebook IPO, the brokerages are out in full force this week and next, milking this cow with both fists until its udders squirt blood. They are pounding the phones from morning til night, taking breaks only to smoke butts and and holler at girls on Broad Street. Then it’s right back upstairs looking for the next Midwestern farmer to call with this deal. You almost feel bad for the kids pushing this stuff, they have no clue what they’re talking about and the big dogs have indoctrinated them. And when it melts down and the customer complaints start rolling in, the principals of the firms will lawyer up and claim that everything was “fully disclosed” and that the buyers were “accredited investors” – apparently you can be fucked over as long as you have a high enough net worth and are deemed to be sophisticated. But the kids on the front lines, they will have their licenses shredded for doing what they were told.
This particular product push has been going on for half a year but the urgency is now reaching a fever pitch. “Mr. Jones, this deal is coming any day now and the longer you wait, the less chance there is that I’ll be able to get you in!” This is their last chance at selling something they can pretend is “exclusive” or “of limited quantity” before the big first day IPO pop, it’s like cramming for finals only the only thing final in this case is the sale to you.
If you get one of these calls this week, don’t express interest and don’t answer any questions. Hang up the fucking phone. And if Facebook is that important to you, play it like everyone else with that burning desire – in the engorged aftermarket. You may buy high, but at least you’ll be buying shares of the actual stock and not a broker-sold mirage.
Way more in the book:
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.