Facebook Investor Spending Month’s Salary Exposes Hype

By Danielle Kucera and Douglas MacMillan - May 25, 2012 3:32 AM GMT+0700

Ryan Cefalu, who lives with his wife and two kids in Baton Rouge, Louisiana, saw in Facebook Inc. (FB)’s much-anticipated initial public offering a chance to buffer his retirement fund. His expectations fizzled along with the stock within the first minutes of trading.

“It’s disheartening to know that things get over-hyped,” Cefalu, a 34-year-old data-systems manager who spent about $4,000 on the stock, said in an interview. “That’s about a 12th of my annual income -- so a month’s salary. I’m trying to do an on-my-own retirement kind of thing.”

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Pedestrians walk past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York on May 21, 2012. Photographer: Scott Eells/Bloomberg

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May 24 (Bloomberg) -- Mike Abramsky, a principal at Red Team Global, talks about his suggestion that Facebook Inc. purchase Research In Motion Ltd. and the potential benefits for the social networking company. Abramsky speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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May 24 (Bloomberg) -- Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and a Bloomberg LP board member, talks about Facebook Inc.'s initial public offering and the potential impact on U.S. investor sentiment. Levitt speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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May 24 (Bloomberg) -- Facebook Inc.’s initial public offering has triggered allegations the social network and banks led by Morgan Stanley selectively disclosed crucial information to investors. Bloomberg's Jon Erlichman reports on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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May 24 (Bloomberg) -- Steven Spencer, a partner at SMB Capital, talks about the performance of Facebook Inc. stock and short-selling strategy. Spencer speaks with Stephanie Ruhle, Erik Schatzker, Scarlet Fu and Dominic Chu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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May 23 (Bloomberg) -- Robert Prongay, an attorney at Glancy Binkow & Goldberg, talks about the lawsuit the firm has filed with a California court over Facebook Inc.'s initial public offering. He speaks with Cory Johnson on Bloomberg Television's "Bloomberg West." Bloomberg's Emily Chang also speaks. (Source: Bloomberg)

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The Facebook Inc. logo is displayed at the Nasdaq MarketSite in New York on May 18, 2012. Photographer: Scott Eells/Bloomberg

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Members of the media stand under Facebook Inc. signage projected on a screen at the Nasdaq MarketSite in New York on May 18, 2012. Photographer: Peter Foley/Bloomberg

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A television technician checks monitors displaying Mark Zuckerberg, chief executive officer of Facebook Inc., inside a satellite truck in the parking lot at the company's headquarters in Menlo Park, California on May 18, 2012. Photographer: David Paul Morris/Bloomberg

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Onlookers peer through the window during the Facebook Inc. initial public offering (IPO) at the Nasdaq MarketSite in New York on May 18, 2012. Photographer: Scott Eells/Bloomberg

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Members of the media broadcast live from Facebook Inc. headquarters in Menlo Park, California on May 18, 2012. Photographer: David Paul Morris/Bloomberg

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News of the Facebook Inc. initial public offer is displayed on a news ticker in New York on May 17, 2012. Photographer: Michael Nagle/Bloomberg

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The Facebook Inc. logo is displayed on a computer screen in this arranged photograph in San Francisco on May 17, 2012. Photographer: David Paul Morris/Bloomberg

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The Facebook Inc. logo is reflected in water droplets in this arranged photograph in San Francisco on May 17, 2012. Photographer: David Paul Morris/Bloomberg

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A pedestrian walks past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York on May 21, 2012. Photographer: Scott Eells/Bloomberg

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Facebook, a site used by 901 million people, allocated more than 25 percent of shares to retail investors, said two people familiar with the offering who asked not to be identified because the process was confidential. That means the value of stock bought by that group for $38 in the IPO has dropped by at least $630 million in total, based on the closing price of $32 yesterday and assuming investors held the stock.

While asset managers and hedge funds got to buy the stock in private trading years before the IPO and investment banks made money in the offering, smaller investors had to wait until last week’s IPO for a piece of the action. The outcome: After Facebook and its underwriters misjudged demand in pricing the IPO and glitches on the Nasdaq hampered trading on the first day, the world’s largest social-network website lost 18 percent in three days. The shares are still about 13 percent under their $38 IPO price after paring some losses.

The stock rose 3.2 percent to $33.03 at 4 p.m. in New York today.

‘Should I Bail?’

Facebook, the biggest technology IPO in history, turned into a quagmire of blame. Buyers of the stock sued the company, Nasdaq OMX Group Inc. and the underwriters, claiming they were misled. The U.S. Securities and Exchange Commission and the brokerage industry’s watchdog both said they may review the offering, and the scrutiny prompted Morgan Stanley (MS), the lead underwriter, to defend its handling of the IPO in a statement.

“I thought it would be fun to get in on the initial frenzy,” said Linda Lantz, an online marketer in Granite Bay, California, who bought 100 shares. “Now it makes me think ‘Oh god, should I bail or is it going to come back?’”

For Cefalu, whose children are age 12 and 1, the first-day glitches meant more than a bad day of trading: they made him buy twice as many shares as he intended after an order he canceled went through hours later, he said. With shares of Zynga Inc. (ZNGA) slumping along with Facebook, he estimates he lost a combined $2,250 as a result of the Facebook debut debacle.

Technical Problems

Michael McClafferty, a freshman finance major at Michigan State University, saw his “first big investment” turn into a $3,000 loss when he sold the shares at $35.

“I didn’t want to lose more,” McClafferty said. “I didn’t know what to do.”

The 19 year-old student estimates he spent $8,000 more than he wanted to while repeating orders that wouldn’t go through on the first day, and failing to cancel them because of the technical problems.

“I didn’t know what happened,” he said. “Then I was like, ‘they should be able to do something about it.’ They messed up pretty big from what I see, and it hurt more people than just me.”

Retail Investors

On its debut, the Menlo Park, California-based website jumped to $45 at the start of trading, which was delayed 30 minutes, before ending the day up 0.6 percent at $38.23. It paled in contrast with Google Inc.’s 18 percent jump in its 2004 initial public offering, Visa Inc.’s 28 percent gain in 2008 and LinkedIn Corp.’s 109 percent surge last May.

“The reaction of the retail investor is ‘Wow, what a flop,’” Jay Pestrichelli, co-founder of the Omaha, Nebraska- based investment adviser Zega Financial, said in an interview.

Frustrations of individual investors were exacerbated by a snafu at the Nasdaq, where trade confirmations were delayed and some orders may have been mishandled. Nasdaq’s woes were felt across the brokerage industry, according to Fidelity Investments, the second-largest mutual fund company.

Some customers who purchased Facebook stock “may have experienced delays in status updates,” Fidelity said in a statement. “This is an industry-wide issue that affected many different broker-dealers and other market participants.”

Fidelity Customer ‘Concerns’

Boston-based Fidelity said it’s working with other brokerage firms to “get Nasdaq to come to a resolution that addresses the concerns of our customers.”

Joseph Christinat, a spokesman for Nasdaq, declined to comment. Larry Yu, a spokesman for Facebook, declined to comment.

Facebook increased the number of shares sold and the price range days before the IPO, raising $16 billion and valuing the company at $104.2 billion.

Pat Brogan, a Yahoo! Inc. manager who trades on sites run by E*Trade Financial Corp. (ETFC) and Fidelity Brokerage in her spare time, called the experience of buying Facebook stock the “biggest fiasco” in her 30 years of day trading.

“They flooded the market with so many shares,” Brogan said. “I’m actually going to dump them if they get back to $38.”

Demand from retail buyers was higher than normal for Facebook, with personal investment website Sigfig.com seeing 10 times more orders than it had for other recent technology IPOs, said Terry Banet, chief investment officer for the site.

“Facebook wanted to get more retail involvement and they succeeded,” Banet said.

‘Obvious Gamble’

Some investors managed to take advantage of the initial gain. James DiMaggio, a 29-year-old product line sales manager at Ametek Inc. in Morton, Pennsylvania, said he bought 200 shares at $38, sold half for $40.98 and made about $280.

“The other half is now tanking,” said DiMaggio, who estimates his losses so far at $320. “It was really exciting in the beginning. I don’t gamble, and this is obviously a gamble.”

In the wake of the stock’s losses this week, small-time investors took to the Web to express their agitation on sites including Twitter Inc. and online investing community StockTwits Inc.

“There’s a lot of questioning about the IPO process in general and a sentiment that the real investor is getting taken by the larger Wall Street,” said Phil Pearlman, executive editor of StockTwits.

Some investors still see potential in the long term. At Sigfig, 7 percent of users who bought Facebook on May 18 sold it the same day, below the 15 percent to 31 percent first-day flipping of stock that has been more typical of recent technology IPOs, according to Banet.

Long-Term Potential

“Short term fluctuations don’t bother me,” said Charles Landry of Sacramento, California, who bought 1,000 shares on May 18. “Facebook has the potential to be, in the long term, one of the iconic companies in Silicon Valley, a la Google, a la Apple.”

Renee Morrison, who runs accounting at Empyrion Wealth Management in Roseville, California, had never bought a stock in her life before investing in Facebook last week. She too plans to wait it out, she said.

“I have been very well educated and prepared that it’s kind of like gambling, there’s no guarantee,” Morrison said.

To contact the reporters on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net; Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Morgan Stanley, Goldman Sachs Sued Over Facebook IPO

By Don Jeffrey - May 24, 2012 3:26 AM GMT+0700

Morgan Stanley (MS), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and other underwriters along with Facebook Inc. (FB) were sued by investors who claimed they were misled in the purchase of the social network firm’s stock.

The plaintiffs, who are seeking to proceed on behalf of a class of Facebook investors, said the company and the banks didn’t disclose lower revenue estimates before the share sale. The members of the proposed class have lost more than $2.5 billion since the initial public offering last week, according to a complaint filed today in Manhattan federal court.

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A Facebook investor sued Nasdaq OMX Group Inc. yesterday in the same court, saying the exchange “badly mishandled” trades in Facebook stock. Photographer: Scott Eells/Bloomberg

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May 23 (Bloomberg) -- Will Duff Gordon, a senior research analyst at Data Explorers, talks about short-selling strategy for Facebook Inc. and market outlook. He speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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May 22 (Bloomberg) -- Bloomberg's Jon Erlichman reports on a Massachusetts regulator's decision to subpoena to Morgan Stanley over talks between a research analyst and institutional investors on revenue prospects for Facebook Inc. Morgan Stanley defended its role in the initial public offering. Erlichman speaks on Bloomberg Television's "Bloomberg West." Bloomberg's Emily Chang also speaks. (Source: Bloomberg)

“The true facts at the time of the IPO were that Facebook was then experiencing a severe and pronounced reduction in revenue growth,” the plaintiffs said in the complaint.

Also sued were units of Bank of America Corp. and Barclays Plc (BARC), as well as Facebook Chief Executive Officer Mark Zuckerberg and Chief Financial Officer David Ebersman.

Facebook went public at $38 a share and plunged 19 percent over two days. Facebook rose 3.2 percent, or $1, to $32 at 4:22 p.m. New York time in Nasdaq trading.

“We believe the lawsuit is without merit,” Andrew Noyes, a spokesman for Menlo Park, California-based Facebook, said in an e-mail. He said the company would fight the claims.

Pen Pendleton, Michael DuVally and Mark Lane, spokesmen for New York-based Morgan Stanley, New York-based Goldman Sachs and London-based Barclays, respectively, declined to comment on the lawsuit. Representatives of New York-based JPMorgan and Charlotte, North Carolina-based Bank of America didn’t immediately return calls for comment.

Revenue Growth

The complaint states that Facebook’s revenue growth is declining because its greatest expansion is coming from users of mobile devices rather than personal computers. The company hasn’t shown advertisements to people who log on through mobile applications, according to the complaint. Facebook booked 85 percent of its revenue from advertising in 2011, according to the complaint.

The banks named in the lawsuit reduced their estimates for Facebook for the second quarter and full year of 2012 and didn’t inform potential investors in presentations before the IPO, according to the complaint.

“The underwriters took down their earnings estimates dramatically during the road show and only told a select group of investors,” Samuel Rudman, a lawyer for the plaintiffs, said today in a phone interview.

Difficult Time

The plaintiffs may have a difficult time proving the case if it’s based on the presentation made to potential investors, according to a securities lawyer.

“It’s going to depend on who knew what when,” Jeremy Garvey of Buchanan Ingersoll & Rooney in Pittsburgh said in a phone interview. “The real question is, based on the final prospectus, were the statements complete and correct?” Garvey said. “If they have enough cautionary language in the prospectus, they do have a bit of a disclaimer.”

A Facebook investor sued Nasdaq OMX Group Inc. yesterday in the same court, saying the exchange “badly mishandled” trades in Facebook stock, which resulted in delays and a failure to complete customer orders.

That investor is also seeking class-action status for the lawsuit on behalf of investors who lost money because their buy, sell and cancellation orders weren’t properly processed.

The U.S. Securities and Exchange Commission has said it will review the first day of trading in Facebook shares.

The underwriter case is Brian Roffe Profit Sharing Plan v. Facebook, 12-04081, and the Nasdaq case is Goldberg v. Nasdaq OMX Group Inc., 12-cv-04054, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Don Jeffrey in Manhattan federal court at djeffrey1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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By Michael P. Regan - May 24, 2012 3:05 AM GMT+0700

U.S. Stocks Erase Loss Amid Optimism on Europe Efforts

By Michael P. Regan - May 24, 2012 3:05 AM GMT+0700

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U.S. stocks erased early losses amid optimism that European leaders will do more to halt contagion from the region’s debt crisis, helping the market reverse a plunge triggered by growing concern Greece will leave the euro.

The Standard & Poor’s 500 Index rose 0.2 percent to 1,318.85 at 4 p.m. in New York, after tumbling as much as 1.5 percent and dipping below 1,300.

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Traders work on the floor of the New York Stock Exchange (NYSE) in New York. Photographer: Michael Nagle/Bloomberg

Global stocks retreated earlier as European leaders meet to discuss the region’s crisis. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank has the tools to curb any damage from Europe’s debt crisis.

Kocherlakota said in a speech in Rapid City, South Dakota, that the Fed probably can’t repair all the damage to U.S. employment from the credit crisis and fiscal policy could help to revive the job market. He said a fall off a “fiscal cliff” would argue for another round of quantitative easing by the Fed.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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European Banks Unprepared for Greek Exit From Euro

By Elena Logutenkova, Liam Vaughan and Gavin Finch - May 23, 2012 7:50 PM GMT+0700

Europe’s banks, sitting on $1.19 trillion of debt to Spain, Portugal, Italy and Ireland, are facing a wave of losses if Greece abandons the euro.

While lenders have increased capital buffers, written down Greek bonds and used central-bank loans to help refinance units in southern Europe, they remain vulnerable to the contagion that might follow a withdrawal, investors say. Even with more than two years of preparation, banks still are at risk of deposit flight and rising defaults in other indebted euro nations.

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UBS, the third-biggest manager of money for the wealthy, sees a 20 percent chance of Greece leaving the euro within six months, the bank’s chief investment office, led by Alexander Friedman, told client advisers in an internal note last week. Photographer: Gianluca Colla/Bloomberg

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May 23 (Bloomberg) -- Goldman Sachs Asset Management Chairman Jim O'Neill, Luxembourg Finance Minister Luc Frieden and Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, offer their views on the possible creation of a common euro-area bond. This report also contains comments from Christian Schulz, an economist at Berenberg Bank, Marchel Alexandrovich, senior European economist at Jefferies International and Yannick Naud, a portfolio manager at Glendevon King Ltd. (Source: Bloomberg)

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May 22 (Bloomberg) -- James Longsdon, a managing director in the financial institutions group at Fitch Ratings, talks about European banks. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

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May 23 (Bloomberg) -- Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics, talks about the future of Greece in the euro zone, the country's political outlook and investor sentiment. Kirkegaard speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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May 23 (Bloomberg) -- Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs Group Inc. in Hong Kong, talks about Europe's sovereign debt crisis, its implications for Asian economies and China's economic growth. He speaks with Susan Li, Rishaad Salamat, John Dawson and Zeb Eckert on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

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May 23 (Bloomberg) -- Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute, talks about Europe's debt crisis, global markets and investment strategy. He speaks with Sara Eisen and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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The Deutsche Bank headquarters in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

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Deutsche Bank , Europe’s biggest bank by assets, tapped “a small amount” of ECB cash to help fund corporate and retail business in continental Europe, where it has sizeable operations in Italy and Spain. Photographer: Hannelore Foerster/Bloomberg

“A Greek exit would be a Pandora’s box,” said Jacques- Pascal Porta, who helps manage $570 million at Ofi Gestion Privee in Paris, including shares in Deutsche Bank AG (DBK) and BNP Paribas SA. (BNP) “It’s a disaster that would leave the door open to other disasters. The euro’s credibility will be weakened, and it would set a precedent: Why couldn’t an exit happen for Spain, for Italy, and even for France?”

The prospect of Greece leaving the 17-nation euro region increased after parties opposed to the terms of the nation’s second bailout by the European Union and the International Monetary Fund won most of the votes in May 6 elections. A fresh round of voting will be held June 17 after politicians failed to form a government. For the first time since the crisis began in November 2009, European leaders and central bankers are speaking openly of Greece abandoning the currency union.

Deposit Flight

The immediate risk for Europe’s banks, and for the euro region, would be a deposit flight from indebted nations such as Portugal, Ireland, Spain and Italy on speculation those countries also might quit the currency. Lenders in Germany, France and the U.K. had $1.19 trillion of claims on those four nations at the end of 2011, Bank for International Settlements data show.

Should Greece go, its new currency probably would suffer an immediate devaluation of as much as 75 percent against the euro, forcing individuals and companies to default on foreign loans, economists at UBS AG (UBSN) said. Unless European leaders could make a credible case that a Greek exit was an exceptional and isolated incident, depositors in other nations might decide to withdraw euros from banks or shift them to countries seen as safer.

“The highest risk facing the banks at the moment is the possibility of deposit runs,” said Andrew Stimpson, a banking analyst at Keefe, Bruyette & Woods Ltd. in London. “The more policy makers continue to openly discuss an exit, the more likely that people in Spain, Ireland and Portugal pull money out of their local banks.”

Greek Withdrawals

That already may be happening. Banks in Greece, Ireland, Italy, Portugal and Spain saw a decline of 80.6 billion euros ($103 billion), or 3.2 percent, in household and corporate deposits from the end of 2010 through the end of March, European Central Bank data show. Lenders in Germany and France saw an increase in deposits of 217.4 billion euros, or 6.3 percent, in the same period.

Greek central bank head George Provopoulos told President Karolos Papoulias last week that savers have withdrawn as much as 700 million euros and the situation may worsen, according to the transcript of the president’s meeting with party leaders published May 15. Greece had 160 billion euros of bank deposits on March 30, down almost 75 billion euros from the peak in 2009, according to the latest data from the central bank.

Greece’s pledge to inject 18 billion euros of capital in the nation’s banks may help staunch the outflow in deposits. The Hellenic Financial Stability Fund said late yesterday it approved terms of the recapitalization and the contract would be sent today to the lenders and the European Financial Stability Facility for final approval.

Rising Odds

The infusion will enable Greece’s four biggest banks to return to the ECB for funding -- after being cut off when capital ratios fell too low -- and provide an additional 18 billion euros of collateral in the form of EFSF bonds.

UBS, the third-biggest manager of money for the wealthy, sees a 20 percent chance of Greece leaving the euro within six months, the bank’s chief investment office, led by Alexander Friedman, told client advisers in an internal note last week.

To prevent contagion, countries in the euro area would have to form a full-fledged political and fiscal union immediately and implement uniform guarantees on bank deposits throughout the region, Thomas Wacker and Juerg de Spindler, economists at Zurich-based UBS, said in a separate note. They said such a response can be ruled out.

The odds of a Greek exit are seen rising over time. Citigroup Inc. analysts this month raised the likelihood of such an event to between 50 percent and 75 percent over the next 18 months after Greece’s inconclusive elections.

ECB Lifelines

“Banks’ risk-management departments have probably taken into account a Greek exit and most would likely have a plan on how to proceed,” said Robert Liljequist, a Helsinki-based fixed-income strategist at Swedbank AB. “The big problem is that nobody really knows what would happen in the markets if the country leaves the currency, so there is a significant amount of risk with that scenario.”

The ECB’s unprecedented provision of 1.02 trillion euros in three-year cash in December and February helped calm financial markets in the first quarter by removing concern that banks unwilling to lend to one another would run out of cash. Lenders in Spain and Italy also used the funds to buy sovereign debt, reducing government borrowing costs.

Euro Decline

The rebound was short-lived as doubts about the health of Spain’s banks and questions over Greece’s future returned. On May 9, the Euro Stoxx Banks (SX7E) index dropped beneath the lows of March 2009. The 30-company index of euro-region banking stocks fell 2.4 percent by 2:45 p.m. Frankfurt time today. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers reached 308.398 on May 18, the highest since Dec. 19, two days before the ECB’s first offering of long-term funds. The euro fell today to a 21-month low against the dollar.

Lenders probably would need another 800 billion-euro liquidity lifeline from the ECB to help stem contagion from a Greek exit, Citigroup analysts estimated in a May 17 note.

ECB President Mario Draghi said last week that Greece could leave the euro area and signaled policy makers won’t compromise on their key principles to prevent an exit.

Spanish Banks

The fresh doubts about Greece coincide with struggles by Spain, the euro region’s fourth-largest economy, to shore up its banks following the bursting of a property bubble. The government of Mariano Rajoy announced this month a fourth effort in less than three years to rebuild confidence in the industry as bad loans soar. The state took control of Bankia (BKIA) group, the lender with the most Spanish assets, and ordered banks to set aside an additional 30 billion euros on property loans.

With Spain’s economy in a recession and unemployment at more than 24 percent, more borrowers are defaulting. Bad loans as a proportion of total lending in Spain jumped to 8.37 percent in March, the highest since August 1994, data published last week by the Bank of Spain show. As much as 8.21 billion euros of loans soured in the first quarter, 90 percent more than in the same period of last year.

Moody’s Investors Service downgraded 16 Spanish banks last week, including the two largest, Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), citing the nation’s economy, reduced funding access for lenders and a deterioration in loan quality. The rating company also cut 26 Italian banks, including UniCredit SpA (UCG) and Intesa Sanpaolo SpA. (ISP)

Moody’s Downgrades

In all, Moody’s said in February it would review the ratings on 114 banks in Europe, as well as eight non-European firms with large capital-markets businesses, to assess the impact of the debt crisis.

Spanish, Italian, French and U.K. banks were the biggest borrowers in the ECB’s long-term refinancing operations, or LTROs, according to data compiled by analysts at Credit Suisse Group AG. While the cash injections temporarily soothed markets, they led to a retrenchment from countries on the periphery of the euro region, undermining the EU’s “solidarity incentive,” said Christine Schmid, a Zurich-based analyst with the bank.

That may explain the recent wave of comments contemplating what was once unthinkable. While German Finance Minister Wolfgang Schaeuble last week urged the Greek government to stay in the monetary union, he signaled that a departure would be manageable as European authorities “react in such a way as to ensure that the consequences are as contained as possible.” Bank of France Governor Christian Noyer told journalists in Paris last week that “whatever happens in Greece” won’t place any French financial institution in difficulty.

Different Tack

A year ago Schaeuble said a Greek exit would create an “exceptionally difficult” situation that would be “hard to control,” while Noyer called the possibility of a Greek default a “nightmare” and a “catastrophe.”

What’s changed is that banks in the so-called core EU countries of Germany, France and the U.K. used funds from the ECB in December and February to insulate their southern European units against losses should one or more country exit the euro.

“If you’re a U.K. lender and you’ve lent 10 billion euros to your Spanish subsidiary and Spain exits, you’re suddenly only going to get paid back in 50 percent devalued pesetas and you’re on the hook for 5 billion euros,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor.

Insulating Units

One way multinational banking groups are mitigating that risk is by replacing their own funding lines to subsidiaries in the region with ECB loans. Deutsche Bank, Europe’s biggest bank by assets, tapped “a small amount” of ECB cash to help fund corporate and retail business in continental Europe, where it has sizeable operations in Italy and Spain. BNP Paribas, Europe’s third-biggest bank, used the programs to help fund its Italian unit as it reduces intergroup backing.

Barclays Plc (BARC), the U.K.’s second-biggest bank by assets, took 8.2 billion euros of three-year loans from the ECB to provide “funding stability” for its units in Spain and Portugal. Lloyds Banking Group Plc (LLOY) said it’s using central bank money to “ring-fence” its Spanish operation. Credit Agricole SA (ACA), which is using 1.6 billion euros of ECB funding for Athens- based Emporiki, reduced refinancing exposure to its Greek unit by half in the nine months through March to 4.6 billion euros.

Sovereign Debt

European banks also have cut their sovereign-debt holdings and exposures to Ireland, Italy, Spain and Portugal. Lenders in Germany, France and the U.K. reduced exposure to Greece by more than half in the two years through the end of 2011 to $68.2 billion, BIS data show. Their claims on the other four countries are down 36 percent in the same period.

The average core Tier 1 capital ratio of the 10 biggest European banks by assets rose to 10.7 percent as of Sept. 30 under Basel 2 rules from 9.3 percent at the end of 2009, according to data compiled by Bloomberg. Most lenders changed at the end of last year to stricter, so-called Basel 2.5 capital rules, making comparison with prior periods meaningless.

The cash and near-cash holdings of the 10 biggest banks jumped 77 percent on average in the two years through the end of 2011, data compiled by Bloomberg show.

Christian Clausen, president of the European Banking Federation and CEO of Nordea Bank AB (NDA), the largest bank in Scandinavia, said a Greek exit from the euro zone is unlikely and won’t be disastrous for the region’s banks if it does occur.

‘Chain Reaction’

“We’ve come to a level in Europe where that can happen without any major repercussions for the rest of Europe,” Clausen said in an interview in Copenhagen on May 11. “Every bank in Europe will prepare for this, but to think it will impact the European economy and banks in general, that will not happen.”

Still, the efforts may not shield banks from contagion. The 1.1 trillion-euro liquidity buffers Europe’s eight biggest banks have to guard against deposit flight and funding-market dislocations will be insufficient if there’s a systemic loss of confidence across the region, Goldman Sachs Group Inc. analysts wrote in a note yesterday. The buffers include cash, deposits with central banks and unencumbered assets.

Loan and currency losses in the event of a euro breakup may reach $1.1 trillion across German, French, U.K., U.S., Swedish, Swiss, Dutch, Austrian and Belgian banking systems, analysts at Paris-based Societe Generale SA estimated in a note last week.

UBS economists Wacker and de Spindler see a “significant” likelihood of a Greek exit “triggering a chain reaction of bank runs and soaring risk premiums on government bonds of weaker countries, and that ultimately breaks up the entire euro zone.”

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net; Liam Vaughan in London at lvaughan6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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Asian Stocks Snap Two-Day Rally on Greece, Japan Exports

By Yoshiaki Nohara - May 23, 2012 7:27 AM GMT+0700

Asian stocks fell, with the regional benchmark index snapping a two-day rally, as concerns mounted Greece may exit the euro zone and Japan’s trade data missed estimates, dimming the outlook for exporters.

Nintendo Co., a maker of video-game players that depends on Europe for a third of its sales, fell 2.4 percent. Mitsui & Co. (8031), a Japanese trading company, slid 0.9 percent. Woodside Petroleum Ltd. (WPL), Australia’s oil and gas producer, lost 1.5 percent as oil fell.

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Pedestrians are reflected on an electronic stock board outside a securities firm in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

The MSCI Asia Pacific Index fell 1 percent to 112.63 as of 9:26 a.m. in Tokyo before the Hong Kong market opened. About nine stocks fell for each that rose, and all 10 industry groups on the measure slid.

“If Greece goes get out of the euro, then that will be a significant event for the market,” said Andrew Pease, Sydney- based chief investment strategist for the Asia-Pacific region at Russell Investment Group, which manages about $150 billion. The market wants to see “a political resolution out of Europe that will either prevent Greece from exiting or, if they do exit, will put in place a strong firewall to prevent contagion effects from going to other countries.”

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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North Korea Denies Nuclear Test Plan as It Upgrades Rocket Site

By Sangwon Yoon - May 23, 2012 7:59 AM GMT+0700

North Korea denied planning a nuclear weapons test while a report indicated it’s upgrading a rocket launch site, conflicting signs that underscore the challenge of gauging the intentions of new leader Kim Jong Un.

The totalitarian regime is building a new launch pad for firing larger long-range rockets at its Musudan-ri site in the northeast, according to a U.S. university monitoring project on North Korea. The report came after North Korea’s Foreign Ministry said last month’s botched long-range rocket launch was intended “for peaceful purposes and we never anticipated military measures like a nuclear test.”

Kim has shown no sign of abandoning his country’s nuclear ambitions five months after succeeding his late father Kim Jong Il. U.S. and South Korean officials have said Kim’s government may soon detonate an atomic weapon to rebound from the embarrassment of the failed rocket launch.

“North Korea is trying to transition the current state of tensions toward one of dialogue,” said Koh Yu Hwan, a professor of North Korean studies at Dongguk University in Seoul. “By saying that they’ve never planned a nuclear test and turning that around as a theory espoused by the U.S., they are de facto saying they won’t conduct one.”

Construction at Musudan-ri began last summer and is in its “early stages,” the U.S.-Korea Institute at Johns Hopkins School of Advanced International Studies in Washington said on its website, citing satellite images taken April 29. The new facility resembles a recently completed Iranian missile center, hinting at a possible connection with Tehran, the report said.

‘Hostile Policy’

The U.S. must end its “hostile policy,” otherwise North Korea will “expand and bolster” its nuclear program, the spokesman said, according to yesterday’s KCNA report. South Korean Foreign Ministry spokesman Cho Byung Jae said the statement left the North’s intentions unclear.

“Until now North Korea’s words and actions have differed, so we take note of yesterday’s statement and will monitor to see how things progress from here,” Cho said.

In Beijing, Glyn Davies, the U.S. special envoy on North Korea policy, said he was “at a bit of a loss to imagine what they’re referring to when they talk about hostile policies.”

Davies, who spoke to reporters after meeting officials including his Chinese counterpart Wu Dawei, said he raised the issue of sanctions on North Korea and “the importance of reinforcing them and taking them very seriously.”

Separate satellite photos of Punggye-ri, a nuclear test site also in North Korea’s northeast, showed additional mining and excavation activity for an underground detonation, James Hardy, Asia-Pacific specialist at IHS Jane’s, said yesterday in an e-mail.

Building Reactor

The regime has also resumed building a light-water reactor at Yongbyon, its main nuclear enrichment facility about 90 kilometers (55 miles) north of the capital Pyongyang, Hardy said, citing aerial imagery published in early April. Such a reactor could supply fissile material for atomic weapons.

Satellite imagery from April 30 shows that the government is close to completing a containment building for a new experimental light water reactor, according to a separate report from the Johns Hopkins’ website.

Davies, who flies to Tokyo today, said May 21 in Seoul after meeting his South Korean and Japanese counterparts that the totalitarian government would face a “swift” response to further nuclear or missile tests.

North Korea on April 13 launched a long-range rocket that it said would put a satellite into orbit. The projectile disintegrated minutes after liftoff.

“That was a miscalculation on their part,” Davies said in Beijing yesterday. “They missed an opportunity to demonstrate their seriousness of purpose.”

North Korea fired rockets from the Tonghae Satellite Launching Ground at Musudan-ri ahead of underground nuclear tests in 2006 and 2009. Last month’s long-range rocket was launched from the Sohae Satellite Launching Station on the northwestern coast.

To contact the reporter on this story: Sangwon Yoon in Seoul at syoon32@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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U.S. Stocks Reverse Gain in Final Hour on Greece Woes

By Rita Nazareth - May 23, 2012 4:44 AM GMT+0700

U.S. stocks erased gains in the final hour of trading as concern that Greece would exit the euro and a tumble in Facebook (FB) Inc. shares overshadowed economic optimism.

Commodity and technology shares in the Standard & Poor’s 500 Index fell, while financial companies gained. Facebook slumped 8.9 percent, dropping 19 percent in two days. A gauge of homebuilders in S&P indexes rose 1.9 percent amid a better-than- estimated housing report. Best Buy Co. (BBY) rallied 1.6 percent after reporting first-quarter profit that exceeded estimates. Dell Inc. tumbled 12 percent at 5:43 p.m. New York time after forecasting revenue that missed analysts’ projections.

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The Facebook Inc. logo is displayed in front of the company's headquarters in Menlo Park, California. Photographer: David Paul Morris/Bloomberg

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May 22 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market. U.S. stocks erased earlier gains as concern that Greece would exit the euro and a tumble in Facebook Inc. shares overshadowed economic optimism. (Source: Bloomberg)

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May 22 (Bloomberg) -- Bloomberg's Trish Regan, Adam Johnson and Alix Steel report on today's ten most important stocks including Best Buy, Urban Outfitters and Dell. (Source: Bloomberg)

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May 22 (Bloomberg) -- U.S. stock-index futures were little changed after the benchmark Standard & Poor’s 500 Index posted its biggest gain in two months. (Source: Bloomberg)

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Traders work at the New York Stock Exchange. Photographer: Scott Eells/Bloomberg

About three stocks fell for each rising on U.S. exchanges at 4 p.m. New York time. The S&P 500 added 0.1 percent to 1,316.63, almost erasing a gain of 1 percent. The Dow Jones Industrial Average lost 1.67 points, or less than 0.1 percent, to 12,502.81. About 7.3 billion shares changed hands on U.S. exchanges, or 8.2 percent above the three-month average.

“Stocks did a 180,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “On a relative basis, the U.S. is the cleanest dirty shirt. Yet Europe is still a dominant story for the market.”

Stocks erased gains after Dow Jones reported that former Greek Prime Minister Lucas Papademos said the nation is considering preparations to leave the shared currency. European Union leaders are planning to gather in Brussels tomorrow to discuss how to revive growth. Equities rallied earlier today as sales of existing U.S. homes rose in April while investors speculated China and Europe will stimulate growth.

Europe Concern

Concern about Europe’s debt crisis drove the S&P 500 down as much as 8.7 percent from an almost four-year high in April. Still, the benchmark gauge was up 4.7 percent in 2012 amid better-than-estimated economic and corporate reports. About 70 percent of S&P 500 companies that reported first-quarter results beat analysts’ estimates, data compiled by Bloomberg show.

“We went from risk-on to risk off pretty quickly,” said Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co. “Greece is not a major economy, but there’s obviously fear of contagion in case it exits the euro. These outside factors will weigh on the market even as economic numbers are good.”

Measures of commodity shares in the S&P 500 had the biggest losses among 10 groups. Crude oil slipped as Iran agreed to let Western nuclear inspectors into the country, easing concern that the conflict over its atomic energy program would disrupt Mideast supplies. Gold and copper also retreated.

Coal Producers

Patriot Coal Corp. (PCX) slumped a record 35 percent to $2.18. The U.S. miner that last week warned of a possible customer default hired Blackstone Group LP and said it’s still working with lenders to finalize $625 million of loan and credit facilities. Peabody Energy Corp. (BTU) lost 3.9 percent to $23.65. Alpha Natural Resources Inc. (ANR) retreated 3.9 percent to $11.21.

Technology shares, which comprise 20 percent of the S&P 500, also retreated. Apple Inc. (AAPL), the world’s most valuable company lost 0.8 percent to $556.97. The shares rose as much as 2.2 percent earlier today.

Facebook, the social networking site that raised $16 billion in an initial public offering last week, plunged 8.9 percent to $31. The offering valued Facebook at 107 times trailing 12-month earnings, more than every S&P 500 member except Amazon.com Inc. and Equity Residential. The slump reinforces concern that the IPO was priced too high.

Too High

Sentiment toward the offering worsened yesterday after Facebook fell below the $38 price set by underwriters, burning investors who speculated the company would mimic IPOs such as LinkedIn Corp. (LNKD), which doubled on its first day. While bulls forecast benefits as companies shift advertising to the Internet, Brian Wieser of Pivotal Research Group LLC, said Facebook’s price is too high and the path to growth unclear.

“There’s always a risk of buying into excessive hype, using rules of thumb for valuation that are divorced from fundamentals,” Wieser, a New York-based analyst at Pivotal, said in a telephone interview yesterday. “There are many things that really speak to the uncertainty investors should be incorporating when they’re thinking about Facebook.”

Dell slumped 12 percent to $13.30 after the close of regular trading. The world’s third-largest personal computer maker lost share in the global PC market in the first three months of the year, according to market researcher Gartner Inc. Dell (DELL) has eschewed sales of less profitable PCs to boost its profit margin, which is causing revenue to slump, said Shaw Wu, an analyst at Sterne Agee & Leach Inc. in San Francisco.

Homebuilders, Banks

Homebuilders rallied as PulteGroup Inc. (PHM) advanced 2.5 percent to $9.08, while Lennar Corp. (LEN) increased 2.2 percent to $27.61. A measure of diversified financial shares had the biggest advance among 24 groups in the S&P 500, gaining 1.4 percent. The KBW Bank Index (BKX) rose 1.1 percent as 22 of its 24 stocks advanced.

JPMorgan Chase & Co. (JPM) jumped 4.6 percent to $34.01, rebounding from a 20 percent plunge following its May 10 disclosure of at least $2 billion in trading losses. Goldman Sachs Group Inc. reiterated its buy rating on the stock today, saying the company’s plan to halt share buybacks reflects a “prudent decision” to preserve capital given the volatility and uncertainty around its chief investment office’s holdings.

Best Buy added 1.6 percent to $18.46. The largest U.S. consumer-electronics retailer lured customers with discounts on smartphones, part of former Chief Executive Officer Brian Dunn’s efforts to compete with Amazon.com Inc. Lower demand for televisions and notebook computers reduced comparable-store sales in the quarter by 5.3 percent.

Urban Outfitters

Urban Outfitters Inc. (URBN) climbed 7.4 percent, the biggest gain in the S&P 500, to $28.10. The retailer that rehired co-founder Richard Hayne as chief executive officer this year reported first-quarter profit that beat analysts’ estimates on record sales.

Ralph Lauren Corp. (RL) added 2.7 percent to $150.27. The retailer of its namesake brand clothing reported profit that beat analysts’ estimates because of sales gains at its own shops and department stores.

Ariba Inc. (ARBA) surged 19 percent to $44.87, the highest level since 2002. SAP AG, the largest business-management software maker, agreed to buy the online-trading platform for businesses for $4.3 billion in the German company’s biggest push into cloud computing.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Michael P. Regan at mregan12@bloomberg.net

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Facebook Tumble Means Morgan Stanley Gets Blame for Flop

By Serena Saitto, Lee Spears and Joseph Ciolli - May 23, 2012 3:17 AM GMT+0700

Let the Facebook Inc. (FB) finger-pointing begin.

After one of the most anticipated initial public offerings in history, Facebook’s 19 percent drop this week prompted investors to fault everything from Morgan Stanley’s role as lead underwriter, to the company’s greed and the Nasdaq Stock Market.

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People walk by the Nasdaq stock market in New York, on May 18, 2012. Photographer: Spencer Platt/Getty Images

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May 22 (Bloomberg) -- Jeff Corbin, chief executive officer of KCSA Strategic Communications, talks about the 19 percent decline in Facebook Inc.'s shares following the company's initial public offering. Corbin speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

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May 21 (Bloomberg) -- Paul Kedrosky, author of the Infectious Greed blog and a Bloomberg contributing editor, and Max Wolff, an analyst at Greencrest Capital Management, talk about trading in shares of Facebook Inc. Facebook fell below its $38 offer price in the second day of trading. Kedrosky and Wolff speak with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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May 21 (Bloomberg) -- Darren Chervitz, research director for Jacob Funds, talks about Facebook Inc.'s stock price performance and the outlook for the social network firm. Facebook, the social networking site that raised $16 billion in an initial public offering, fell below its $38 offer price in its second trading day. Chervitz speaks with Trish Regan on Bloomberg Television's "InBusiness." (Source: Bloomberg)

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May 22 (Bloomberg) -- Bloomberg's Dominic Chu reports that after one of the most anticipated initial public offerings in history, Facebook’s 11 percent drop on Monday prompted investors to fault everything from Morgan Stanley’s role as lead underwriter, to the company’s greed and the Nasdaq Stock Market. He speaks on Bloomberg Television's "Inisde Track." (Source: Bloomberg)

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May 22 (Bloomberg) -- Cliff Lerner, chief executive officer of Snap Interactive Inc., talks about the impact of the drop in Facebook Inc.’s shares on Snap's stock. Lerner talks with Trish Regan on Bloomberg Television’s “InBusiness.” (Source: Bloomberg)

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The Facebook Inc. logo is displayed at the Nasdaq MarketSite in New York, on May 18, 2012. Photographer: Scott Eells/Bloomberg

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A pedestrian walks past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York, U.S., on Monday, May 21, 2012. Photographer: Scott Eells/Bloomberg

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Facebook Inc. Chief Financial Officer David Ebersman, seen here, was the point person on the deal, while Mark Zuckerberg and Chief Operating Officer Sheryl Sandberg weighed in on major decisions throughout the process, people said. Photographer: Tony Avelar/Bloomberg

“It was like the gang that couldn’t shoot straight,” said Michael Mullaney, who helps manage $9.5 billion as chief investment officer at Fiduciary Trust in Boston. He said he placed Facebook orders for clients. “The underwriters mis- estimated what actual demand was, and there was pure execution failure coming out of the Nasdaq.”

Taking the most heat is Morgan Stanley, said Mullaney. The bank was lead underwriter among the 33 firms Facebook hired to manage the $16 billion sale of stock. The bank decided with Facebook executives to boost the size and price days before the May 17 IPO, ignoring advice from some co-managers, said people with knowledge of the matter, who declined to be identified because the process was private. Morgan Stanley (MS) talked with few of its fellow underwriters aside from JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS) throughout the IPO, one person said.

“They overplayed the enthusiasm and probably just misread the atmosphere of the marketplace,” said Keith Wirtz, who oversees $15 billion as chief investment officer at Fifth Third Asset Management in Cincinnati and bought some stock in the IPO.

Blame Game

Facebook increased the number of shares being sold in the IPO by 25 percent last week to 421.2 million and raised its asking price to a range of $34 to $38 from $28 to $35. Had Facebook kept the original terms, investors may have had a better shot at a first-day pop. Instead, the stock was little changed in its debut because Morgan Stanley intervened to prevent it from falling below the IPO price.

The shares fell 8.9 percent to $31 at the close today, after an 11 percent drop yesterday.

Just days before Facebook raised the size and price of its IPO, the company began telling analysts to lower their sales forecasts, people familiar with the matter said. Morgan Stanley analysts were among those who cut their projections during the roadshow, said one person. The move also followed a May 9 filing in which Facebook said advertising growth hasn’t kept pace with the increase in users.

Investors Misled?

Some investors say they felt misled by the underwriters. According to one London-based fund manager who asked not to be named, bankers indicated demand was so strong that he placed a bigger order than he thought he would get, leaving him with 40 percent more Facebook shares than anticipated. He sold most of that stock on the first day of trading.

The decision to boost the price range reflected the demand in the market, said a person involved in the process. Michael DuVally, a spokesman for Goldman Sachs, and Pen Pendleton, a spokesman for Morgan Stanley, declined to comment. Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment. Underwriters didn’t say how great demand was.

Morgan Stanley and Facebook consider problems with Nasdaq OMX Group Inc.’s computer systems among the reasons for the IPO’s performance so far, according to people familiar with the matter. Nasdaq’s trading platform was overwhelmed by order cancellations and updates that made the stock-market operator unable to finish the auction required to open trading. The U.S. Securities and Exchange Commission said it will review the trading.

Nasdaq Software

Nasdaq Chief Executive Officer Robert Greifeld said on a call with reporters on May 20 about the glitch that the opening delay “had no apparent impact on the stock price,” noting the share decline began after all brokers had received confirmation about their trades in the opening auction. Robert Madden, a spokesman for Nasdaq OMX, declined to comment beyond Greifeld’s statement.

Nasdaq said in a notice yesterday it delivered all outstanding execution and cancellation messages to brokers for their IPO cross orders at 1:50 p.m. Facebook declined 5.9 percent after 1:50 p.m.

Facebook CEO Mark Zuckerberg and the early backers should be held accountable for the stock drop, said Francis Gaskins, president of researcher IPOdesktop.com in Marina Del Rey, California. Goldman Sachs, Accel Partners, Digital Sky Technologies and other existing holders boosted the number of IPO shares they offered in Facebook on May 16, a day after the company increased its price range.

‘Mispriced’ Market Value

“It’s a combination of Zuckerberg’s ego for that $100 billion market cap, and the shareholders selling who wanted an exit,” said Gaskins. “Somehow it just missed them that this was mispriced.”

Larry Yu, a spokesman for Menlo Park, California-based Facebook, declined to comment. Rich Wong, a partner at Palo Alto-based Accel Partners, and Yuri Milner, founder of Digital Sky Technologies in Moscow, didn’t respond to requests for comment.

Facebook Chief Financial Officer David Ebersman was the point person on the deal, while Zuckerberg and Chief Operating Officer Sheryl Sandberg weighed in on major decisions throughout the process, people said. At Morgan Stanley, Dan Simkowitz, chairman of global capital markets, was one of the main bankers on the offering. Michael Grimes, global co-head of technology investment banking at Morgan Stanley, also played a key role.

Underwriters did accomplish part of what they set out to do: turn paper into cash for pre-IPO holders.

“It was successful for the liquidating owners, absolutely, because they got all that and then some,” said Peter Sorrentino, a fund manager who helps oversee $14.7 billion at Huntington Asset Advisors in Cincinnati.

For the investors it was a different story.

“I shame the people who were lining up to buy the thing,” said Sorrentino, whose firm didn’t buy stock in the IPO and tried to talk clients out of purchases. “The financials were there, do the math. Everyone wanted to be caught up in the glamour offering of the year. People just had stars in their eyes.”

To contact the reporters on this story: Serena Saitto in New York at ssaitto@bloomberg.net; Lee Spears in New York at lspears3@bloomberg.net Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Facebook Investor Sues Nasdaq Over Delays in Offering

By Bob Van Voris - May 23, 2012 5:28 AM GMT+0700

A Facebook Inc. (FB) investor sued Nasdaq OMX Group Inc. (NDAQ) claiming the stock exchange “badly mishandled” Facebook’s initial public offering, delaying trading and failing to cancel orders when requested by customers.

Phillip Goldberg, a Maryland investor, said in a complaint filed today in Manhattan federal court that he tried to both order and cancel requests for Facebook shares through an online Charles Schwab Corp. (SCHW) account the morning after the May 17 IPO. He is seeking to represent a class of investors who lost money because their buy, sell or cancellation orders for Facebook stock weren’t properly processed, according to the filing.

“Orders placed by investors seeking to purchase Facebook shares during the first trading day often took hours to execute,” Goldberg said in the complaint. “In the meantime, the investors seeking to purchase those shares had no idea if their trades had executed, and, accordingly, had no idea if they owned Facebook shares at all.”

Goldberg, who claims Nasdaq acted negligently, is seeking unspecified damages. The U.S. Securities and Exchange Commission has said it will review the opening day of trading in Facebook shares on Nasdaq. The exchange has blamed poor design in the software used to drive auctions in IPOs.

Public Trading

Robert Madden, a spokesman for Nasdaq, didn’t immediately return a call seeking comment on the suit. Ashley Zandy, a spokeswoman for Facebook, the world’s biggest social network, declined to comment on the suit.

Goldberg claims that on May 18, he tried to make a series of limit buy orders through his online account. The trades failed to execute and he tried to cancel. Instead of canceling the trades, Goldberg’s account reflected the cancellation orders as “pending” throughout the day, he said.

Goldberg said that even with the cancellation orders, one trade, at $41.23, was executed about three hours after it was placed, when Facebook shares were trading at about $38.

Some investors lost money when their orders to cancel trades weren’t processed, as Facebook’s share price declined and buy orders were executed at the higher, earlier prices, Goldberg claimed. Others weren’t able to determine whether their orders had been executed, making it impossible to sell the shares and avoid losses, he said.

Thousands of Investors

Goldberg cited press reports blaming the delays on New York-based Nasdaq and claiming that as many as 30 million Facebook shares were affected. He said there are thousands of investors in the class he seeks to represent in the suit.

Goldberg alleged that Nasdaq was negligent in failing to ensure trades were executed quickly and correctly, in not exercising effective quality control and in failing to oversee employees and contractors involved in executing the trades.

Facebook, which raised $16 billion in its initial public offering, fell 8.9 percent to $31 today at 5:20 p.m. New York time. The price was $7 below Facebook’s $38 offer price.

The IPO valued the Menlo Park, California-based company company at $104 billion.

The case is Goldberg v. Nasdaq OMX Group Inc., 12-CV-04054, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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Shale Glut Means $1-a-Gallon Savings at the Pump

By Eduard Gismatullin and Jeremy van Loon - May 22, 2012 9:59 PM GMT+0700

Tomohiro Ohsumi/Bloomberg

A liquefied natural gas (LNG) tanker operated by Energy Advance Co., a unit of Tokyo Gas Co., is moored at the company's Sodegaura plant in Sodegaura City, Chiba Prefecture, Japan, on Thursday, March 22, 2012.

Chad Porter wants to run his 18- wheeler trucks on frozen natural gas along a highway that crosses Canada’s Rocky mountains even before the world’s longest chain of refueling stations gets built to keep them fueled.

The chief operating officer of oil services company Ferus Inc. bought two vehicles to test liquefied natural gas and reckons switching from diesel may cut 22 percent from his fuel bill, or about $1 a gallon. At the moment, Calgary-based Ferus uses mobile tankers to refuel his trucks, which cost about C$100,000 ($99,000) more than conventional vehicles, adding expense to a project that’s about saving money. A Royal Dutch Shell Plc (RDSA) project will make it easier to fill up.

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A Shell natural gas liquefying plant. Source: Shell

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“Gas in our view will be the fuel of the future,” said Royal Dutch Shell Plc Chief Executive Officer Peter Voser. Photographer: F. Carter Smith/Bloomberg

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Shell’s plan to spend $250 million on an LNG plant and a string of filling stations is the biggest single investment yet in making frozen gas a transport fuel, a shift advocated by proponents of energy independence including billionaire investor T. Boone Pickens. Photographer: Jacob Kepler/Bloomberg

Shell’s plan to spend $250 million on an LNG plant and a string of filling stations is the biggest single investment yet in making frozen gas a transport fuel, a shift advocated by proponents of energy independence including billionaire investor T. Boone Pickens. Switching engines to run on LNG is becoming economic because a glut of fuel from North America’s shale rocks has made the U.S. the world’s largest natural-gas producer and forced prices to record discounts versus crude oil.

“LNG holds great potential as a transport fuel,” Mark Williams, Shell’s director for downstream, said in a speech this month. “North America, for example, now has a century of gas supplies at current consumption rates. So gas is likely to gain market share in transportation.”

Special Coolers

Using LNG in vehicles has limitations, from fuel evaporation to the special coolers needed at filling stations to keep the gas at minus 162 degrees Celsius (minus 259 Fahrenheit), making it mostly suitable for long-haul trucks with large gas tanks. U.S. truckers spent more than $135 billion on fuel last year, according to American Trucking Association.

“We would take advantage of any infrastructure that gets built,” Ferus’s Porter said in an interview from his office in Calgary.

Shell agreed to work with filling-station owners Flying J Inc. to offer LNG to trucks along the highway, from Fort McMurray in Alberta, the heart of Canada’s oil industry, to Vancouver on the Pacific coast, more than 900 miles (1,600 kilometers) to the southwest. At today’s diesel prices, fuel for each run on the route by a typical 33,000-pound, 60-foot truck costs about C$550.

The roadway, which comes within about 235 miles of Mt. Robson, the range’s highest peak at 12,972 feet, passes through part of Canada’s oil and gas producing region, as well as the mining and forestry operations of companies including Teck Resources Ltd. (TCK/B)

‘See Opportunities’

“We see opportunities for a concept like this one in other areas of the world as well,” said Jose-Alberto Lima, Shell’s vice president for LNG and gas sales in Americas. He said Shell, based in The Hague in the Netherlands, doesn’t expect a rebound in gas prices anytime soon.

In addition to being cheaper, natural gas burned in trucks emits as much as 25 percent less carbon dioxide, as well as almost eliminating particulate matter and sulfur dioxide produced by diesel-powered vehicles, according to the Calgary- based Van Horne Institute. Using natural gas, a fuel where North America is self-sufficient, would also cut demand for imported crude oil.

Shell eventually plans to deploy LNG technology to power trains, ships and mining industry engines. Gas overtook crude oil to account for more than 50 percent of the company’s production for the first time this year. It expects to expand the use of LNG as a transport fuel beyond North America to Europe, China, Latin America and Australia.

Future Fuel

“Gas in our view will be the fuel of the future,” Shell Chief Executive Officer Peter Voser told shareholders today. The company has more than 40 trillion cubic feet of gas resources in North America, about 12 percent of the continent’s total at the end of 2010, based on data from BP Plc (BP/)’s Statistical Review of World Energy.

The Anglo-Dutch company’s Green Corridor project in Canada will make 300,000 tons of LNG a year. It plans to start production at its first small-scale gas liquefaction plant at Jumping Pound near the route’s halfway point next year.

“These trucks are more expensive than the traditional diesel trucks today,” Shell’s Lima said. “You need to have economies of scale to bring these costs down.”

Shell is cooperating with Vancouver-based Westport Innovations Inc. (WPT), the maker of cryogenic fuel tanks and the only currently available 15-liter gas-powered engine suitable for heavy-duty trucks running on LNG.

Compressed Gas

The second Canadian maker of gas powered engines is Cummins Westport Inc., which makes smaller 8.9 liter heavy-duty unit. The Vancouver-based joint venture of U.S.’s Cummins Inc. (CMI) and Westport has designed a motor able to run on either compressed natural gas, CNG, or LNG.

CNG is used for light- and medium-duty vehicles, such as buses and garbage trucks. LNG, which is using a cryogenic technology to chill gas and reduce it to one-six-hundredth of its original volume at low temperature, is offered mostly as a fuel for heavy-duty vehicles.

CNG, which is stored at ambient temperature, requires tanks with thicker walls to hold the pressure and provides less energy per volume. Therefore, long-haul trucks can take more LNG on board in lighter chilled tanks with less time required for refueling per energy unit.

“Drivers have been very receptive to LNG trucks, especially since they drive like diesel trucks,” said Cara West, a spokeswoman at Paccar Inc., which designs and manufactures trucks under Kenworth, Peterbilt and DAF nameplates and where Ferus bought its vehicles. “Dealers are receiving multiple inquiries from customers anxious to learn more about LNG trucks.”

Market Share

Paccar currently equips some of its Kenworth and Peterbilt models with LNG engines. The Washington state-based maker expects the gas-powered-truck market share in North America to expand to about 20 percent in the next several years, up from about 6 percent now.

With natural gas fuel taxed about 20 Canadian cents less a liter than diesel on equivalent basis, it takes less than five years for a driver to return extra investment benefiting from cheaper fuel, according to the Canadian Natural Gas Vehicle Alliance. Canada has more than 100 LNG powered trucks almost equally split between western and eastern parts of the country operated by Vedder Transport, a milk hauler in British Columbia, and Robert Transport, which operates in Quebec and is expanding the fleet.

In January, President Barack Obama said tax breaks for natural-gas powered trucks will help cut dependence on imported oil in the world’s largest crude-consuming country. “We, it turns out, are the Saudi Arabia of natural gas,” Obama said. The U.S Senate and House have been reviewing the bill to boost greater use of the gas.

Huge Resource

“The potential is there, and when you have this huge resource in the U.S., and you’ve got almost 10 million barrels per day imported being used for transportation fuels,” said Theepan Jothilingam, an analyst at Nomura Holdings Inc. At some stage, the U.S. government “will need to give a tax break and encourage both the technology and the execution of this technology.”

Billionaire investor Pickens has been lobbying for incentives to stimulate greater use of natural gas as a vehicle fuel to replace imported oil. Pickens is the largest shareholder of Clean Energy Fuels, a natural-gas supplier for bus and truck fleets, which is building America’s Natural Gas Highway across the U.S. to fuel long-haul trucks with LNG starting from the end of this year.

About 30 percent of U.S. “classic trucks” can be converted to run on LNG, which needs highly utilized vehicles running lots of miles to pay back for the additional engine costs by fueling it with cheaper LNG, said James Burns, Shell’s general manager for LNG in Transport, Americas. “Emissions is a key issue here as well both on local air emissions and green- house gas emissions.”

To contact the reporters on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net; Jeremy van Loon in Calgary at jvanloon@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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