The Investigators

May 16, 2012 5:13 PM

BBB warns potential investors of pitfalls ahead of Facebook IPO

TUCSON - Facebook is expected to make an initial public offering of stock this Friday, and the Tucson chapter of the Better Business Bureau warns prospective investors to be wary of the hype that can accompany a high-interest IPO like Facebook.

"Many inexperienced investors may be drawn towards jumping into the stock market for the very first time," said Kim States, BBB President. "In fact, we routinely teach our children investment strategies through the purchase of familiar brands' stock, like Disney, McDonalds and Wal-Mart. But despite explosive growth to date, whether Facebook will be a wise investment has yet to be determined."

Read the BBB news release below for commons traps and problems that plague potential investors:

While past performance is one thing to look at when evaluating an investment, other things to consider are the company's ability to sustain growth, the valuation of the stock against earnings, competition and future trends including, in the case of Facebook, an increased number of mobile device users.

When the stock hits the market Facebook's CEO, Mark Zuckerberg, will retain a controlling interest of 57 percent of voting shares, giving him virtually absolute power over the company. A bad decision, scandal, or other management crisis, could cause a drop in company stock, and investors would have little recourse to demand changes.

BBB and the Financial Industry Regulatory Authority's Investor Education Foundation (FINRA) offer the following common investor traps based on investor complaints and how to avoid them:


Misrepresentation

Misrepresentation can occur when a broker purposefully makes untrue representations of material facts or omits material information. This can happen in any security in any account, but this problem is commonly found with low-priced, speculative securities because of their increased risk.

How to Avoid This Problem

Ask the broker to send you information that will back up his/her representations.
• If you rely on your broker, make sure the investment meets your objectives; and make sure you understand and are comfortable with the risk, costs and liquidity of the investment. Never invest in a product you don't understand.
• Ideally, you should independently verify information by thoroughly reading a prospectus, research reports, offering materials, annual reports (10K), quarterly reports (10Q), brochures or other documentation.
• Keep contemporaneous notes of your conversations with the broker.

High-Pressure Sales Calls (Cold-Calling)

When an investor receives frequent phone calls, is badgered, insulted or told that the caller is an expert or has "inside information," these are all signs of high-pressure solicitations.

How to Avoid This Problem

• NASD's Telemarketing Rule (NASD Rule 2211) limits the calling time to between 8 a.m. and 9 p.m. Brokers calling must identify themselves by providing their name, firm name, address or phone number. If you do not want such calls, ask the caller to place you on the firm's "do-not-call" list.
• Find out about the broker's background via FINRA BrokerCheck or by calling the FINRA BrokerCheck Hotline (800) 289-9999. Call the Maryland Securities Division of the office of the Attorney General and Better Business Bureau.
• Meet with your broker and visit the firm, if possible. Investments are major financial undertakings and should be afforded the same degree of investigation and caution as any other major purchase you might make.
• When opening a new account, read the New Account Agreement carefully for all the terms and conditions, especially margin and credit terms. Fully understand what you are agreeing to.
• Ask for and review written material before buying.
• Check confirmations and account statements carefully. Look for evidence of unwanted credit or margin use.
• Take immediate action if you detect a problem. Time is critical.
Other resources are available on this topic via the Internet, such as the Securities and Exchange Commission's Cold-Calling Web page, and information from FINRA about Telemarketing Rules to protect investors.

Unsuitability

A suitability problem can involve any security and occurs when an investment made by a broker is inconsistent with the investor's objectives and investing profile (e.g., age, financial status, long-term goals, income and net worth of the customer).

How to Avoid This Problem

• Read and understand the terms of any new account agreement you may be asked to sign with the firm. Make an informed decision before agreeing to allow the broker to use discretion in buying or selling your investments. Also, fully understand how margin and other credit provisions work and the circumstances in which you could be asked to pay additional monies.
• Understand and agree to what is being purchased before the transaction occurs. If you can't explain it, don't buy it.
• Provide the firm with accurate information and don't inflate your net worth, income etc. Be candid about disclosing financial constraints. Doing so would help prevent running into a problem.
• Ask to review what is on file at the firm regarding your account, such as a new account form with client profiles, margin account agreement, options account agreement, discretionary account agreement, etc. You have the right to know what is on file about you, and information must accurately reflect your objectives-age, financial status, long-term goals, income, net worth, etc. These are the documents the brokerage firm's compliance staff uses to monitor broker's activities, and provide an opportunity for the firm to intervene early if any problems arise. If it gets to that point, regulators use this information as well when investigating a complaint.
• Do your homework, review prospectus material and conduct other research.
• Thoroughly read and retain your monthly account statements, confirmations and any other information you receive about your investment transactions.
• Be proactive, ask questions (How is this in line with my investment objectives? What is my risk of losing money on the investment? What has been the past performance of the investment? How liquid is this investment, and what are the costs of liquidating the investment and other barriers to sale?).
• Keep good records of communications with the broker. Contemporaneous notes of your conversations with the broker will help. Also, repeat your sense of the conversation to ensure you both have the same understanding. Be careful not to be the victim of miscommunication. For example, when a broker says "can I put you down for x shares" he really means can I purchase them for you.
• Can you afford to use margin or other credit? If you can, know exactly what to expect and under what conditions you may be required to pay additional funds should the price of the security drop.

Unauthorized Trading

Unauthorized trading involves the purchase or sale of securities in a customer's account without the customer's prior knowledge and authorization. Remember, brokers generate commissions through executing transactions (sales or purchases). Pay close attention to activity in your account.

How to Avoid This Problem

• Document (keep notes) all conversations with brokers.
• Thoroughly read and retain, in a timely fashion, your monthly account statements, confirmations and any other information you receive about your investment transactions.
Take immediate action if you see a transaction you do not recognize. Time is critical. Reconcile any discrepancies at once. Contact the firm's branch manager. And, send a telegram, or registered or overnight letter to the compliance department of the firm refusing the purchase. Also, follow up with a phone call to the firm's compliance department. The longer the lag time, the less substance and credibility your argument has.

For more information and tips on scams to avoid, visit the Southern Arizona BBB at:

http://tucson.bbb.org/

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