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Banking law: Facebook's banks under fire after funding shorting of stock

Investment banks Goldman Sachs and JP Morgan, who were both involved in the Facebook listing last month, have come under further intense scrutiny this week after it was revealed that both banks may have helped to fund shorting of the stock by hedge funds.

The Facebook Initial Public Offering (IPO) was the biggest in stock-market history, and valued the company at just over £100bn with shares opening at $38.

However, the IPO has also proved to be one of the most controversial.

The NASDAQ exchange that lists the stock immediately came under fire after major investors were unable to know which of their opening day trades had been successful. It is reported that the top four so-called 'market makers' lost some $115m on the first day of trading alone.

The stock has since fallen to trade at $29 a share, knocking some $40bn off the initial valuation.

The lead banker in the IPO was JP Morgan, which has now come under fire from investors who claim that only some favoured parties were given full access to information about Facebook's prospects by the bank in accordance with stock-market regulations.

This particular allegation has been robustly denied by JP Morgan.

"Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations," a statement read.

It has now emerged that both JP Morgan and Goldman Sachs, who were also heavily involved in the listing, may have lent money to hedge funds to short the Facebook stock.

This is entirely within the rules, and is expected of the major banks that will make money not only if the listing goes well but also if it goes badly. However, this has prompted some to call for a shakeup of investment laws in the US and elsewhere to protect ordinary investors.

Daylian Cain is a professor of business ethics at Yale School of Management.

"Wall Street has conflicts of interest and conflicts of interest are profitable," he told the Wall Street Journal.

Financial observers claim that it is perfectly natural for banks to engage in all sorts of activity around a share flotation, and that the market would not work if there were only buyers and not sellers.

Sources:

Facebook banks under fire after helping bet against float (The Independent)

Nasdaq plays tough with clients angry over Facebook (Reuters)