good afternoon and welcome to capital account i'm laurin the star here in washington d.c. these are your headlines for friday may twenty fifth two thousand and twelve it has been a week since facebook's disaster day view we've now seen shareholder lawsuits subpoenas not to mention a whole lot of mind numbing news coverage and what was an over valued i.p.o.

price that's at the core of it but why did so many people miss this in the first place even though there was plenty of evidence to indicate it up at all it could that be to blame reggie middleton will be on the show to talk about it remember he laid out all of the problems with facebook's valuation on this show long before the i.p.o. and. aside this facebook case may illustrate some problems with this. you know. what i'm talking not about fighting actually i'm talking about the chinese wall the one that's supposed to exist and wall street firms separating research analysts from investment bankers and i want you to remember washington tore down this wall entirely in some cases it appears going forward with the misnamed jobs act we'll talk about it and this is a. big day to bring back the very in demand lord of the day it is herd mentality

and it doesn't pay to follow it will explain why let's get to today's capital account. spend a week since last friday when the facebook i.p.o. shocked retail investors when one of the biggest stock offerings to ever hit wall street was a major disappointment you can see some of the headlines there that were hyping it ahead of the i.p.o. saying that facebook was needing that with its valuation well how wrong not turned out to be at i.p.o. to thirty eight dollars per share at close just under thirty two dollars today

that's not usually the case with the hottest i.p.o.'s ever now there are questions about crucial mistakes made by nasdaq the exchange where the i.p.o. was placed but let's leave those aside for the moment because what's more interesting to us are questions surrounding whether analysts cut expectations during the road show because they learned new disappointing information about the company's outlook but only told privileged institutional investors about it meanwhile mom and pop investors were in the dark left to buy the stock at the offering price like suckers now this aspect has resulted in senate scrutiny shareholder lawsuits subpoenas from regulators and a lot of brouhaha here's the thing though stepping back. i'm sorry no one was forced to buy facebook stock no one was you know they had to hand over their money at this price to buy this stock and no one was shut out from reading plenty of analysis or doing due diligence of their own to find that facebook was not

a great deal to begin with reggie middleton is an independent analyst he called this exactly he laid out all of the reasons why facebook was overvalued at its offering price on this show weeks ago and on his blog for much longer meanwhile facebook's valuation the interest in the stock along with perhaps images of mark zuckerberg getting a rock star reception during the road show created this impression that facebook was the hottest i.p.o. to come along for a while so is reggie just that much smarter than the people that were pricing this stock and offering it not to say that he has it but could it also be summed up by this something he writes about. the study of how to rip your client's face off or screw your client that's one way you could look at it but here to talk more about the details is reggie middleton entrepreneur best entrepreneurial investor excuse me author of the very popular boom bust blog and very accurate predictor of what

was an overvalued price for facebook first so first of all reggie thanks so much for being on the show let's do a little victory lap congratulations on getting facebook so right. it would thank you very much you know the company is good to have you with. i know the feeling of likewise here reggie you know we now see lawsuits from shareholders a lot of retail investors upset feeling like they got duped by all of the hype surrounding facebook but reggie isn't the bigger picture here aside from the regulatory issues that people need to do their homework and not just buy into hype but exactly you know facebook was a method question a math question and even if you aren't good at math you can use simple common sense remember that someone is going to show you how to use facebook you said you weren't even on it you know about all your friends some much money they spend on it now

much you know even if you don't know the analysis going through income statements about she's cash flow statements etc you do know that in order to be worth something has to make money how does facebook make money if you don't know anybody who's ever spent money on facebook and you know it should be considered risky stuff despite that you know you had a road show with very very slick sells people you know the two morgan banks as well as goldman sachs and you had a very good story stuff you know company that everybody use but nobody ever gave money to put those two together you had a lot of hype a lot of froth and you know it turned out it was a lot of hype a lot of false but the stocks because i saw through it since it launched right let's get into some of these issues because with so much hype surrounding it and it being a story stock the way that you've laid out on this show before is that why there was so much demand an interest from retail investors or were there other factors

too are there you know there are financial brokers saying oh you got to get in on this you know what factors do you think really went into the interest among retail investors aside from being a story stock. bifurcating you know for a said story stock and then you had the underwriters who are doing their job you know their job their clients the corporate and cities that are going public facebook is the goldman's client stand his client and j.p. morgan's client and they did their job which was to get the maximum amount of capital to the private showed it is possible when the copyright public and thirty dollars is probably the maximum i could ever possibly have gotten now whether that has anything to do with the actual value or the shares is a totally different story you know remember price is not equal value you know that he was but some things worth price is what you charge somebody for. what is their job from their perspective now the problem is and this is a conflict the underwriters happen to be the same corporate and city the same and

city and that the advisers are there. mr mom and mr joe schmoe and even institutions what to buy and you have two people on opposite sides of the fence you know advising the two different clients with a guarantee conflict of interest and that showed it right here and there that there was no end of this that should have had a buy or even a hold on facebook stop if i could see was just a deal with then goldman sachs and a look at him of a stance and a good team with hundreds of employees of thousands of employees and maybe a you know four hundred million to a billion dollar budget could have start you know if they can see it another two hundred was christine it so you know everybody that should have i.p.o. with a so rating at thirty dollars should i.p.o. to the serving at thirty two dollars or thirty or even twenty nine the fact that there was in a cell means that you had a significant conflict between the so-called analysts and the salespeople which were the underwriters so in essence you don't really have an. especially with

underwriters they have a source analytical. department you know they're not sure that's what they are still support staff. you know they're there to support the sales in the trainings that. you know of course that's terrible word in the program give them a lot of nasty e-mails but prove me wrong by you know possible while there's a dare for any of our naysayers in the audience so just to be clear because there is supposed to be a chinese wall between investment bankers and analysts within those banks you're saying there's no chinese wall here these analysts are pushing the stuff like a. small like a china town wall you know it's a japanese wall. you know if there was a chinese wall then as i said and he and the local staff work through their metal you know who even had access to a spreadsheet or a pencil and paper and they could have figured out that facebook was overvalued so if there was truly a chinese will you have them of the staff at odds with the sales staff ok but there

is no chinese wall because of this chinese will there's a big chance of coming communicated this you know present information back and forth that made them a little stale cooperate with the sales that. you know they'd say the same thing i would you know you have to be a genius you know again the how many people do you know that they gave money to facebook yeah not any unless maybe you play that farmville game or you know give money doesn't know which and which gives it to facebook but that aside reggie so are you saying that these sell side analysts they're not they're not just bad at their job they're purposely not doing the job of accurately estimate ing any of the metrics in order to indicate that this was an overvalued stock they are simply going to go ahead of you looking or say basically that they have a vested interest in not doing good accurate work. the analytical staff or the underwriters typically have the vested interest but i don't

want to you know paint a broad brush on all and there's a lot of hard working so say and this and they try their best to do what they can but you know and this is that basically coggs in the machine if you get too accurate too often and you come into conflict with the real moneymakers which was the transactional and the agency revenue streams and then you got to be as the the data down are you going to be asked to leave well combination of both so you know there have their hands tied you know if you take a look at all the pills that have been you know floated over the past year and a half see how many pills that were floated with there and a little staff saying that is the sell at the i.p.o. day you know try and find one you know it would be very difficult to go and buy something from and then surely with the other side if you see you know your food you know. of this in the underwriting for use cost salesman where you go to of course so that you see go up on

a call and say i need inspection of the car companies it's but because for me before he said to me you know what is supposed to see right you know it's extreme conflict of interest extreme right well and also there is the aspect of because i used to work in equity research i worked for an independent firm that was very contrary and and chose to do very good work as opposed to just cozying up to management teams and getting access and regurgitating management spin which was what our firm believed sell side analysts did because the benefit to them of their job was not necessarily to do the best analytical work but to have good relationships and access to management that clients of the firm want to do is that would you disagree or agree with that. i mean that's it in the shell and the issue is you don't necessarily need good relations with the management to analyze the firm it does help ok but if the management is not motivated to give you the whole picture. right and. again that picture and then you know sometimes axis imagery can

color perception yeah you know i've analyzed i've called the fall of more for the major banks many insurance companies you know of sovereign nations etc i did it without having access to any of the management you know talk to the manager and two plus two is always going to equal four and that's the math is wrong right it doesn't matter if you know that you know the magic up you're not math is math and it's probably better because then you don't have that conflict of interest of wanting to keep that good relationship so being afraid to say something bad you have the independence to call a spade a spade regimental ten when we come back we're going to talk more about the regulatory side of this because that is an aspect of this story that i do want to touch on we'll have more after the break with reggie middleton entrepreneurial investor also still ahead it's back by popular demand the word of the day and i'll respond to your comments and your feedback too but first your closing market number .

drives the world the fear mongering used by politicians who makes decisions to break through that sort of people have made who can you trust no one who is you who with a global missionary see where we had a state controlled capitalism school sessions when nobody dares to ask we do our t.v. question more. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else or see some other part of it and realize everything. you don't i'm talking hard it was a big issue. the

mayor would like a little luck and they alone until they'll get the real headline with none of them are the problem with the mainstream media today is that they're completely disconnected from the viewers and for what actually matters to those viewers and so that's why young people just don't watch t.v. anymore if they want news they go online and read it but we're trying to take those stories that people actually care about and transfer them back to t.v. . welcome back we're talking facebook with reggie middleton who we're doing a little victory lap with because he called this ok he did his homework he's a good analyst he said facebook was overvalued gave

a million reasons why maybe not a million but a lot meanwhile just like sheep to the slaughter people got creamed by the stock they poured into it so we're talking about some of the conflicts of interest that may have resulted in this hype between underwriters and analyst with these massive wall street firms that take companies like facebook public but also there have come up with this issue becoming to light some of these rules surrounding i.p.o.'s that sound like they benefit the big guys and really do not benefit the little guys that got really crushed with facebook so let's bring back an entrepreneur investor author of boom bust blog because i want to get his take on that aspect of the facebook debacle now reggie i know that this is been all talked about everybody's been covering facebook and so shocked that it did what it did with the i.p.o. this is one of the only things that out at cocktail parties friends have asked me about because in washington people aren't as into finance is where you are in new

york but everybody is intrigued by this facebook story which i think gets to what you were talking about which is that this is a story stock average people care and we're interested in this so i guess a question for me because you know a lot of people are talking about that analysts now reportedly cut their estimates midway through the road show which was a big deal they're out they had a weekend outlook and this was reportedly relayed to them from facebook's management team possibly anyway they only told some preferred clients and institutional investors and obviously that inconveniences or disadvantages the small guys but there's evidently some rules that you are allowed to do that with institutional investors and the reason is that they're sophisticated enough to handle that information and know how to use it whereas you know joe schmoe down the street can't is that an unfair. you know i was tempted to just cut you off and say stop before you finish because you know there's been so much b.s. one person can swallow at one time if someone tells you you know it's someone tells

you you know this company is about is not going to make nearly as much money as we thought it's going to make you know so you should so that should buy ok do you need to be a sophisticated investor to be able to handle or want that information or would any everybody who's going to buy the stuff want to know that stock that is why it will as it was once hard to pin you know to a bit you know that's absolute nonsense you know if you walk down the street and someone says it's about the rain you know his umbrella do you mean that my big big clients will be six foot tall because they can handle a rose does everybody want to hide from the rain you know that that's absolute nonsense and you know the be truthful if it does go to court hopefully you get a judge you know in the jury who believe in equity and not necessarily the particular letter of the law because right is right and wrong is wrong you know it's just that simple you know who wouldn't want to know that facebook is on its way it will is this that it was right no i mean everybody would want to know that everybody that wants to know you know what people are officially saying within these firms and don't want to you know look at some independent analysis but that

aside. the question for me is with something like facebook and all of these issues that have that are surrounding it we have also seen regulations passed and laws passed the jobs act was signed which rules back a lot of these rules surrounding i.p.o.'s for smaller companies emerging growth companies that have brought in one billion dollars now on its face you say hey well those are a lot of investor protections but we're just talking about a quote unquote investor protection that only protects big institutional investors and not the small guy so could rule rolling back some of these i.p.o. rules and regulations actually be a good thing that benefits just individual investors. either rule them back or make them realistic you know you don't protect the investor by you know everybody should do their own homework ok nobody should be protected against you know. it is basically you know if you don't do you keep it a price or not do your own homework if you want to protect investor you make sure you eliminate conflicts of interest you make sure you eliminate the tenets of fraud

if not for it itself is not punished you know you do things that the investor cannot do for themselves and the rest that should be if you can come in should be invited in investing in stocks which you cannot do if you cannot perceive the limits of the constraints of the extents of the conflicts of interest within the corporation you know and so that's something that you see in these do you know do things for the investor that they can't do themselves and let's not pretend that people can we absolutely and the moral of the story too is read count don't just accept that the emperor is wearing clothes if the emperor you can plainly see is naked reggie middleton thanks so much for being on the show and for again so much of his growth but ok i like to just say you know you're probably one of most particularly those. persons that i avoid your competition then i just find out that used to report independent sell side by side from what yeah analytical from since you know so it all comes together you know your situation and

loquacious this is attractive so i'm sure your audience agrees thank you and that's the nicest thing i've ever heard in a lake in a very happy friday for me thanks so much that's reggie middleton entrepreneurial investor. all right we thought today was a great day to bring back by popular demand word of the day were we break down a financial term or concept for our very smart viewer but maybe just not the financial expert not the reggie middletons of the world today given what we're talking about with our guest herd mentality now why we're talking about this should be self-explanatory but if not let's recap remember the headlines facebook valued at record breaking stock market debut one hundred four billion dollars retail

demand for facebook risks inflating i.p.o. because there was so much interest in it so the hype is just one of the reasons why we're talking about herd mentality let's move on to what exactly herd mentality is ok when hype doesn't lead to anybody's expectations maybe herd mentality was at play ok it's a financial term what does it mean it describes how people are influenced by their peers to adopt certain behaviors follow certain trends it's the observable tendency of people to conform to what the group is thinking or doing irrespective of their own instincts psychological experiments most notably the ash conformity experiments published in the fifty's have been done to demonstrate this behavior of the ash experiment when a little something like this. this. is apparently.

that guy confer forms now that was just a parody but the real ash lab studies showed how subjects when given a test with a group even though they knew the crack dancer they actually gave the wrong answer to conform with the incorrect answers of the group in other words they would rather be wrong with lots of people rather than write alone now i should warn you that study was only done with male subjects no word on how it would have gone with women but this is something this herd mentality concept is something we see in the markets all the time and it's one of the reasons why bull markets often and they're run in an exponential flameout as the herd of sheep starts to pile on to the same small patch of grassland trampling over one another as they push each other over a cliff or as a herd of sheep think a stock is going to be the hottest i.p.o. we're garbus of evidence to the contrary now in these scenarios it is the independent thinker the person not afraid to break ranks with the herd that comes

out on top and if you watch the show chances are you aren't part of the herd but consequences of her mentality illustrate why that's a good thing and now everybody knows what that means. all right it's friday that means it's time for some of your feedback bell huey seventy two on the note of what we're talking about said earlier this week why would anyone be interested in buying shares and what i call face plant in these market conditions that is a great question that we've obviously been asking hopefully we've cleared it up and you obviously are part of the herd we can but the issue to bed now but i just had to bring up that wordplay faceplant pretty much sums it all up now also this week

we talked a lot about jobs and loose change we talked about the uptick in job listings looking for ninjas and jet eyes we mused on why that would be to haunt had a great take on it i thought the ninja jet i terminology in job recruitment for the younger employee strikes me as simply a vanity sale technique used in recruiting to make goal of all employees feel better when they're dumped on with excessive workloads you may be on to something it's a when you know the jazz it up make everybody feel better about being overworked now we also covered a story about men increasingly taking jobs in female dominated industries and we looked at the gender divide on both sides now bamban twelve wrote regarding men and women in the workplace all i can say is lauren so smart hugh might as well be a man well first of all very flattering nice compliment i'm glad you think i'm smart but i have to call you are you creating being smart with being a man because if so i think you need to hang out with some more women we talked

about how joblessness too in some demographics is higher if you have some college verses none at all now we talked about job growth and and losses. brown five five zero six one wrote on our you tube channel as for job growth tell that to h.p. who is laying off thirty thousand people sad that i have a degree in i.t. and i'm making less than a district manager of mcdonald's well be grateful be grateful if you are employed period and i just wanted to say thank you for writing in because it's important to remember that the jobs crisis is a very personal human one we always talk about the economic side of things the financial side of things i appreciate viewer for sharing the personal side of things now byron and five said lauren in capital account i really appreciate your financial coverage news coverage and analysis but most often it seems that you cover how bad things are and who is getting away with what could you try to do more towards offering suggestions for people to invest and head in this toxic financial

environment first of all thanks for the nice words second i wanted to say if you haven't go watch our march twenty seventh episode with chris mayer he survived war a financial he's author of world right side up and with him we spent the entire show talking about investment ideas and opportunities he traveled the world looking for them finding the good opportunities in these tough and bizarre paranormal times we'll try to do more of this kind of thing in the future though because obviously you want it and groovy and cow on you to pointed out an error that i made here it is too steady has got our attention we want to bring it to yours first americans work thirty percent more than americans. obviously americans can't work harder than themselves i met thirty percent or americans work harder then europeans i obviously misspoke funny because we combined that story with one about how americans also are taking their vacation days on a personal note we mused about how if the show some of us don't and after that i

received a nice to eat about how we probably should so this is a good time to tell you that we are off for the memorial day holiday on monday no show and with that that's our show for today thank you so much for watching and make sure to come back tomorrow in the meantime you can follow me on twitter out lauren lyster give us feedback at youtube dot com slash capital account or watch as they need to deal on hulu dot com slash capital dash accounts and from everyone here have a great weekend thanks for watching and have a great night. there hasn't been anything good on t.v. . it is to get the maximum political impact possible. before source material is what helps keep journalism honest real world.

we want to present. something. it is easy to do it's. easy for you. to meet. you know how sometimes you see a story and it seems so silly you think you understand it and then you glimpse something else and you hear or see some other part of it and realized everything you thought you knew you don't know i'm tom harvey welcome to the big picture.