Our good friend and contributor Josh Brown, a financial advisor who runs theReformedBroker blog says the bucket shops are in full tilt trying to scam ignorant but rich people in Reg D vehicles, promising them that they will hold Facebook shares. BTW, Brown wrote our cover story, “Staying Out of Murder Holes,” a primer on which financial products to avoid.
“If you have a working telephone and an affluent zip code, you have likely been getting all kinds of calls from brokers over the years, but none so insidious as the one I’m about to reveal.
“The bucket shops in lower Manhattan, northern New Jersey and Long Island simply couldn’t watch the Facebook & social media IPO desperation blood orgy from the sidelines without springing into action.
“Brokers have a NASA-calibrated schmuck-seeking radar and it hasn’t set off this many schmuck alarms since the aftermath of the Netscape deal in the mid-90’s.
“The frenzy for the Facebook debut is a target to fire at the size of Mike and Molly’s haunches laid end to end and believe me, the brokers want to hit that target hard. ‘It’s a fuckin’ layup,’ I’ve been told by a few of my former colleagues, “as soon as they hear the word Facebook it’s a done deal, I’m getting their social security numbers.”
“So here’s how it’s going down…
“For the past 9 months, low-rent broker-dealers have been accumulating shares of Facebook and Twitter from the fringes of the employee pool of these companies. Some are free-trading but most are 144 insider shares (which cannot be sold right away). They’ve created private funds to hold these shares, named them, packaged them and set them up as Reg D vehicles. They’ve exhaustively beaten the story into their sales forces, gotten the brokers all hopped up on promises of large inside commissions (the kind the clients don’t see) and the potential to ‘become monster producers’ as a result of what these IPOs will do upon launch – ‘your clients are going to make MULTIPLES on their money!’
“What they’ve not explained in great detail to the ‘kids in suits’ who are being mobilized to sell this shit is that their clients aren’t actually getting pre-IPO shares. What they’re getting instead is shares in a fund that may or may not hold a good amount of these shares. The funds are loaded with all kinds of contingencies and miscellaneous fees and caveats. They are also able to do whatever they want with the money raised, including taking shots on other venture deals that sound social media-y enough to qualify. The PPMs (private placement memorandums) are written so as to protect the firm from everything and anything that could go wrong (and it will all go wrong). The money is being held in escrow and the clients are signing their lives away.
“Making a deal with the devil is child’s play compared to doing principle business off-exchange with a third-tier boiler room brokerage firm.”
For the complete blog post, go to Brown’s blog. He also recommends these sources.
Are You Being Scammed By Your Broker? (Benzinga)
Every Lie Told By “Gryphon Financial” Better Than The Last (Dealbreaker)
If I Were a Broker, Here’s How I’d Sell Facebook (TRB)