“(MoneyWatch) Facebook has yet to go public, but it is already a breeding ground for securities fraud. The SEC late Wednesday filed charges against two money managers for misleading investors eager to buy stock in the social networking company ahead of Facebook’s highly anticipated IPO later this year.
The SEC alleges that the fund managers raised a total more than $70 million from investors to acquire shares of Facebook, Twitter, and other technology companies before they go public. In a related move to clean up the growing market for shares in popular social media firms, securities regulators also accused an online service called SharesPost that matches buyers and sellers of pre-IPO stock of operating without registering as a broker-dealer, as required by law.
SEC official say the secondary market for shares in pre-IPO companies is growing and poses a risk even to sophisticated investors. “While we applaud innovation in the capital markets, new platforms and products must obey the rules and ensure the basic fairness and disclosure that are the hallmarks of sound financial regulation,” said Robert Khuzami, director of the SEC’s enforcement division, in a statement.
The SEC alleged that money manager Frank Mazzola and his firms, Felix Investments and Facie Libre Management, created two funds to invest in Facebook and other high-profile tech companies. But the firms engaged in “improper self-dealing” by collecting higher commissions than what they had disclosed in marketing materials aimed at investors seeking to purchase Facebook stock, according to the agency. SEC officials said that improperly raised the price of shares in the social network.
Mazzola and his investment firms also are accused of deceiving investors in funds that had been created to buy stock in pre-IPO companies. One investor was falsely told that a fund set up Mazzola’s firms had acquired stock in Zynga (ZNGA), a well-known social gaming company that went public in December. The firms also allegedly made false claims about the financial performance of Twitter to attract investors to a fund set up to buy stock in the micro-blogging startup before it goes public…”