Insight: Who got Facebook shares? Fairness may not come into it

NEW YORK (Reuters) - A lot of loyal Facebook fans and occasional investors are discovering a hard truth this week: Money and connections talk, especially when it comes to a deal handled by Wall Street.

The scramble for shares in what is one of largest initial public offerings in U.S. history quickly divided the haves from the have-nots on Thursday. Those with big brokerage accounts and a long history as customers of Wall Street firms likely got at least part of their orders for Facebook shares filled, but would-be buyers who had no such ties were lucky to get any.

"This is worse than not scoring an invitation to the best party in high school," said Fran Carpentier, 57, a publishing and marketing consultant in New York City who wanted to get in on the social media company's IPO but could not figure out how.

Facebook raised about $16 billion on Thursday by selling roughly 421 million shares at $38 each. That is approximately half a share for each of its 900 million active monthly users.

Demand for the long-awaited deal, meanwhile, has been surging, helped by wall-to-wall media coverage. Orders for Facebook shares outweigh the supply by a ratio of more than 20 to 1, according to traders' estimates.

Aside from wanting the cachet of owning the next big thing, investors are eager to buy something that may deliver big, even astronomical returns -- a rare opportunity in today's low-yield and turbulent markets. IPOs often offer an early pop, even if the shares stumble later, and Facebook is seen initially climbing further than most.

Some analysts expect Facebook shares to rise by as much as 50 percent, or even more on the first day.

Facebook and underwriters, as usual, kept mum about overall demand ahead of the IPO. Facebook, which will trade under the ticker FB, did not return calls for comment.

There have been growing expectations in the market that small investors, as opposed to big pension and mutual fund managers, will get as much as 30 percent of the deal. That's a bigger chunk than the 10 percent to 15 percent that is typically allocated to retail investors. It is a result of efforts by Facebook executives to make shares available to more users.

Underwriters are accommodating Facebook's wishes. But the allocation may still not be nearly enough to meet demand.

That puts financial advisers and brokerage houses in the uncomfortable position of not having enough shares to satisfy Main Street investors clamoring to be a part of the hottest IPO since Google's 2004 debut.

One of those investors is Mary Furlong, who runs a marketing firm for baby boomers in Lafayette, California. "I want to buy shares. I missed the Google opening," she says, but did not end up getting hold of any shares.

Google, whose founders made "Don't be evil" a core principle, in 2004 issued its stock through a more transparent process known as a modified Dutch auction. Underwriters gathered bids from investors regardless of their connections or size of their portfolios.

That created more of a level playing field for potential investors. Google's shares were priced at $85, climbed to $100 on Day 1 and are now trading at about $623.

Facebook is selling its shares through a traditional Wall Street IPO, a more subjective process, one managed by investment bankers.

"The deal is probably not 'fair,' but there's no way it can be," said Bruce Foerster, owner of South Beach Capital Markets and former head of global equity syndicate at Lehman Brothers. "If you don't have ties to Facebook management, if you don't have accounts and an investment history with firms that are co-managing the deal, why should you get any stock?"

MANAGING EXPECTATIONS

The demand for Facebook shares has put immense pressure on the 17,000-plus financial advisers at Morgan Stanley Smith Barney, the brokerage unit of Morgan Stanley, one of the IPO's lead underwriters.

On Monday the company told advisers that its retail customers would be limited to a maximum 500 shares per account, only to increase the limit to 5,000 on Thursday, according to sources familiar with the situation.

Mindful that customers would be frustrated, Morgan Stanley early on distributed a script to its brokers on how to handle requests from clients, said one veteran broker.

"The minute someone says 'Facebook,' we're supposed to say, 'Yes, we're the lead, but we can't talk about it,'" the broker said. "I heard from three or four clients, and I told them there is no way I'll be able to get them shares because I haven't done IPO business in years."

Other brokerages are in the same boat. Bank of America's Merrill Lynch brokerage is limiting retail clients to a maximum 2,000 shares per account, according to brokers at the firm.

Wells Fargo Advisors, the brokerage arm of Wells Fargo & Co, has a scoring system for allocating shares among its more than 15,000 brokers. It weighs brokers' annual revenue production, how much IPO work they do and how long their clients held positions in prior IPOs, according to one Wells Fargo broker.

Then in turn, brokers score their clients based on assets with the firm, how much they have traded in the past, and how long they've held onto previous allocations of shares in IPOs.

"I can't just get Facebook shares for my buddy," said one Wells Fargo adviser, who declined to be named because he is not permitted to speak to the press.

At Fidelity, the funds and brokerage giant, Facebook shares will be reserved only for clients with at least $500,000 in assets, excluding 401(k) plans, or those who make at least 36 trades a year with the firm, according to Fidelity spokesman Stephen Austin.

Loyalty helps: Fidelity customers who have being doing business with the firm for the longest periods get higher priority in the IPO food chain.

While excluded investors may feel spurned, there's nothing illegal about banks selling shares to their best customers. Whether it is fair to everyone is another question.

"People have argued that it leaves other investors out, especially for hot IPOs, where in the after-market the prices are likely to be much higher," said Jill Fisch, a professor at the University of Pennsylvania Law School.

Maurice Costello, a former broker who works as an accountant in the Boston area, says he has ordered Facebook at $37 a share through his E*Trade account. But he has no idea how many shares he might ultimately receive.

The online brokerage, which typically caters to small investors, is one of 33 firms named by Facebook to distribute its newly issued shares. E*Trade would not comment on the Facebook IPO.

For some investors, buying into the IPO doesn't necessarily mean holding on to the stock. Richard Laermer, who is CEO of social network ThankBank, is clamoring to get Facebook shares and flip, or sell them, at a profit.

"I am going to do what I did with LinkedIn, Groupon, Google, Research In Motion, AOL, Netscape, Dunkin Donuts ... plus a host of 90s stocks that I can't even recall," Laermer wrote in an email to Reuters. "Buy on Day One, sell on Day Three. It never fails."

(Additional reporting Alistair Barr, Olivia Oran, Jessica Toonkel, John McCrank and Jennifer Cummings; Editing by Jilian Mincer, Martin Howell and Steve Orlofsky)

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