Roger McNamee of Elevation Partners calls NASDAQ & Morgan Stanley Criminals in Facebook IPO Debacle

Roger McNamee, co-founder of Elevation Partners, appeared on Bloomberg TV’s “Money Moves” with Deirdre Bolton today and said that NASDAQ and Morgan Stanley conduct in Facebook IPO is “criminal” and exposed “extreme corruption.”

Besides the smashing the Facebook IPO Roger actually has some great advice.  Specifically, Mobile computing is changing the web in a big way and the old rules are changing.  The power is moving away from the middleman.  McNamee says build tools not web sites.   Be a value investor not a momentum investor.  He hints to the bubble popping.  (Side note: I have to get him on for a real chat).

“The first thing is that it has ended the possibility of anybody else going public for probably the rest of the year. I think they may be doing us a favor. The second thing is it exposed in my mind the extreme corruption in the capital formation process and really in Wall Street itself. NASDAQ’s behavior in this in my mind borders on criminal. JPMorgan Chase’s behavior borders on criminal. Morgan Stanley’s behavior borders on criminal…clearly this was done on purpose. You watch what all of these people have been doing in secondary markets. Do you think it is a coincidence that every secondary offering trades down five or six days before the offering. Then they price it down 15%, and then it pops? It sure looks like the underwriters are shorting the stocks. What I am saying as a 30-year investor, I think people on Wall Street have just so totally lost track of honesty. It is staggering.”

On high frequency trading:

“High frequency trading is part of the problem. It advantages the NASDAQ traders over all other market participants. It allows them to pick off all price arbitrage before it ever hits the market. That is so fundamentally corrupt. Look at the profits of these firms. Their clients are more like Marx now. I have been doing this 30 years and people say has it always been like this? No, it was never like this…I am saying for all the corruption that took place in the LBO community in the 1980’s and all that, you never had people manipulating whole markets. The de-regulation has allowed people to overwhelm any individual market for brief periods of time and move it so most of these things aren’t trading. They are arbitrages set up by overwhelming amounts of capital. Experienced market observers see this, and none of us know what to do about it because the regulators are asleep. There is a set of really clear regulations left over from the Depression that affect consumer products like mutual funds. But there is nothing for hedge funds and market makers, so they are running amok.”

On how the Facebook IPO could have been different if it happened 10-15 years ago:

“The difference today is that because of high velocity trading and the lack of regulation of the primary investing of banks, they make so much money from trading, that investment banking is now an afterthought. The fees on IPOs is 7%. It used to be so big that people would kill to get an IPO. Now it is a rounding error compared to the damage they can do in other parts of the market.”

On the worst thing that went wrong in the Facebook process:

“Let’s say for example there are 25 things you have to get right on an IPO. They blew at least 24 of them. They allowed people to cancel orders during the quiet period three days before the deal. I have never heard of that ever happening in an IPO before. It was clear NASDAQ systems didn’t work in the morning. They should have cancelled the offering first thing in the morning when it didn’t work right. NASDAQ clearly is at fault for not cancelling and postponing the offering. Morgan Stanley is at fault for increasing the size of the deal and price with a complete absence of demand.”

On whether Facebook thought the IPO would go smoothly:

“Of course. I was naive. I was looking at this thinking how could they possibly dare to screw up the largest tech IPO in history. This is Facebook. hey have 900 million members. You blow this and it’s out there in the public and eventually the SEC is going to have to look. When they look, all these people are going to have to explain 24 horrible decisions in a row.”

On what has changed in the tech industry over the past year:

“The really profound change is that we are no longer in a world of the internet and the World Wide Web. Those are the terms we still use, but because of Apple’s success with iPhones and iPads and the success of Android, half of the devices connected are smart phones. They operate totally differently. I say to entrepreneurs stop worrying about Google, Microsoft, don’t worry about search and don’t think about the web. Focus everything on small mobile devices, particularly iPhones and iPads. It is important because every time something comes along like Pinterest or Instragram that is still part of the old world and it gets sold for $1 billion or whatever, everybody goes wow, I can do the old stuff. No, no, no. We are in a different phase. I call it the hypernet. The internet is just the old wired world. Eventually these devices are going to be 80% of the connected devices. The things we did with Google are going to seem like ancient history very soon.”