The upside of down stock markets

9:00 AM markets, stock, upside No Comments

Business Week | By Kathy Kristof, Kiplinger

Nobody likes a downturn. But play your cards right during a market crash, and you could avoid taxes on your stock gains for years to come.

Tax season reminds me just how much I love a good stock market crash.

When my accountant recently informed me that I wouldn't have to pay taxes on nearly $50,000 in profits I netted last year from the sale of stocks (including three in the Practical Investing portfolio), it occurred to me that I should share my crash-oriented portfolio-restructuring and -rebalancing strategy.

In a nutshell: I save big moves for times of crisis. That allows me to rejigger the mix of stocks, bonds and cash in my portfolio and to trigger losses at the same time. My method is not as meticulous as the regular rebalancing that most advisers encourage. But for those of us with taxable accounts who are willing to accept a little financial messiness, my strategy can work nicely.

You see, the greatest thing about capital losses is that they never expire. Tax rules allow you to use losses to offset gains, plus up to $3,000 in ordinary income, every year. When you have excess losses, you get to roll them forward to be used in future years.

So when you have an opportunity to trigger big losses -- far more than you'd be able to use in a year -- and to rebalance or restructure your portfolio at the same time, you should jump at the chance. After all, that sort of opportunity doesn't come along every day. You really need a market crash like those that occurred in 2002 and 2008. Eventually, we'll have another bear market -- and perhaps another crash -- so it pays to be prepared.

The best way to explain it is with an example. Back in 2008, when the market was falling through the floor, I sold my main mutual fund holding, Vanguard Total Stock Market Index (VTSAX). I had built up the holding over the previous ten years by making regular monthly contributions into a taxable account.

Why a taxable account? Mainly because of its flexibility. I have assets in tax-deferred retirement accounts, too. But because you have to pay income taxes on withdrawals from IRAs, 401k plans and the like (and generally penalties on withdrawals made before age 59?), you shouldn't use the money in those kinds of accounts for emergencies or, say, to buy a car. I think everyone should have money in a taxable account for such needs.

My taxable account was worth more than $300,000 at one point, well over my cost of roughly $257,000. When the market dropped in late 2008, the account's value fell to $177,000. Selling triggered an $80,000 loss.

The moment the sale cleared, I started buying. I didn't want to repurchase shares in the same fund, and I couldn't if I wanted to preserve the tax losses. (Tax rules bar claiming a tax loss when you repurchase the same or "substantially identical" shares within a month of a sale.)

My portfolio was loaded with big-company stocks, and I had wanted to shift money into smaller companies and real estate stocks for some time, but didn't want to trigger taxable gains. The market upheaval gave me the chance to make the move with positive tax consequences.

I like what this restructuring did for my portfolio, too. I put the proceeds into three exchange-traded stock index funds: Half went to Vanguard Mid-Cap ETF (VO), 25 percent to Vanguard Real Estate Investment Trust ETF (VNQ) and the rest to Vanguard Large Cap ETF (VV).

While all stock indexes have been soaring since the bull market began in 2009, the mid-cap and REIT ETFs have performed extraordinarily well. Over the past five years through March 7, both funds have more than tripled in value (including reinvested dividends). I'll have to pay taxes on those gains eventually, of course -- but not anytime soon.

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The new science behind stock charts

1:00 PM behind, charts, science, stock No Comments

| By Richard Satran, U.S. News & World Report

Behavioral finance research is unearthing evidence that a visual plotting of stock values leads to better investment decisions.

Those crazy-sounding chart formations like "death cross," "cup and handle," "dragonfly dojo" and "falling knife" that stock traders wave about on graph paper sometimes sound as scientific as divining rods or wishbones. But behavioral finance is unearthing growing evidence that shows those wild-eyed technical analysts are not just reading astrological charts and have one thing scientifically right: Plotting stock prices visually leads to better investing decision-making.

The stock market has been gaining this year with help from one important chart signal -- the level of market "exuberance" as seen in buy and sell patterns and market volume. "It has been a market rally that has been avoiding excesses," says longtime technical analyst Philip Roth. This behavior points to more gains, he adds, but a lack of enthusiasm -- a healthy sign for now -- could eventually derail the rally.

Purging passion from market decision-making is one of the basic rules chart followers live by. They see the market as a virtual animal whose moves can be read through the emotional extremes of fear and greed, which comprise market sentiment at a given point in time. They point to the work of MIT finance professor Andrew Lo, whose behavioral psychology experiments and long-range studies have shown the impact of these animal spirits.

Studies of such market dynamics have "already demonstrated an ability to understand many aspects of financial markets," wrote Lo in a recent paper on efficient markets, although he adds that the science is "in its infancy." He studied day traders and hedge fund managers in depth, using tools of neuroscience and behavioral studies to show that markets are ruled primarily by emotions, challenging the long-held view that they price stocks based on information alone.

But other researchers warn against basing your next stock market purchase on what today's "pitchfork" or "ascending triangle" might say, because charts alone don't inoculate against the risks of emotional decision-making.

Other behavioral science studies find the limits of such tools. Duke neuroscience and psychology professor Scott Huettel has done research that shows people often see patterns that are not there, or that others do not see in the same way that would produce a meaningful buy or sell signal. "People are very good at thinking they see trends that don't mean anything in just a random sequence of numbers," Huettel says. "You really cannot predict things that way."

So what has behavioral science shown that those charts are good for? This, at least: Information presented visually is a lot better than a bunch of numbers, behavioral scientists have found.

Anya Samak, now an assistant professor at the University of Wisconsin School of Consumer Science, ran an experiment while doing research at the University of Chicago in which she gave theoretical cash amounts to students to invest in the market. Those with access to visual data ended up with significantly more cash in their portfolios.

The use of visual tools helps counteract information overload and complexity, she says, and "enables users to interactively discover information from large information sets to improve the financial decision-making process." Her work also suggests people gain confidence and base decisions on a wider range of choices when using visual data.

Behavioral psychology studies suggest the value of presenting data visually, but only as a tool in making an informed decision. Indeed, David Littlejohn, chief technical analyst at BigFoot Investments, says charts are extremely valuable in making investment choices, but technical analysis alone does not work. It's just one tool to use along with a full view of a company's earnings and business fundamentals.

He offers the following tips for people who want to incorporate "chartistry" into their investing decisions:

1. Start with a fundamental look at the company based on its earnings and dividend potential. "Don't start by looking at charts," Littlejohn says.

2. Use the same metrics consistently. The process of charting stocks aims to provide consistent benchmarks and measurements that remove emotion and replace it with specific buy and sell targets.

3. Watch moving averages. This is the basic concept of charting. When a stock moves out of its trading range, it suggests movement, up or down.

4. Question your emotions. "Most of the time when you base a decision on emotions, you will be wrong," Littlejohn says.

He reaffirms the first point: Don't get carried away with charts. "Before you even start doing that, evaluate the fundamentals because they are what supports everything. Otherwise, you are just running with the lemmings," he says.

Technical analyst Roth puts less stock in those fundamentals, and still argues that emotions will always trump "information-based" decisions. After working for nearly 50 years on Wall Street at firms such as Morgan Stanley and Miller Tabak, Roth has dealt with his share of skeptics. Now in retirement, but still an active market-watcher, he feels vindicated by the work of behavioral scientists. "It's a huge confirmation from academia when they say there is information in those chart patterns," he says. "We've known it for 100 years. We called it market psychology. Now it's behavioral finance."

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Activision Blizzard a stock to watch

2:30 PM Activision, Blizzard, stock, watch No Comments

| By Mark Baumgartner, MSN Money

The world's biggest video-game publisher appears on an MSN Money list of recommended stocks. Here are StockScouter's investment ideas.

Activision Blizzard (ATVI) shares soared 15% today as Wall Street cheered the news that the video-game publisher is becoming independent again.

In 2008, French media and telecommunications company Vivendi (VIVEF) took a controlling stake in Activision, based in Santa Monica, Calif., creating a video-game powerhouse that combined Vivendi's Blizzard Entertainment unit (developer of the online role-playing game "World of Warcraft") with the maker of "Call of Duty" and other popular console games.

Activision on Thursday said it would buy 429 million shares from Vivendi at $13.60 a share, funding the purchase with a combination of $1.2 billion in cash and the assumption of $4.6 billion in debt financing.

Separately, an investment group led by Activision CEO Bobby Kotick, with partners that include co-Chairman Brian Kelly and Chinese Internet portal Tencent (TCEHY), said it would acquire about 172 million shares for $2.3 billion, with the partners kicking in a combined $100 million or so of their own money.

The transactions will shrink Vivendi's stake in Activision Blizzard to about 12% from 61%. Vivendi, headquartered in Paris, had been shopping its stake in Activision Blizzard so it could concentrate on its music, television and cinema assets. It's the parent of the world's biggest music company, Universal Music Group, as well as pay-TV provider Canal Plus. Vivendi said some of the proceeds from the divestiture will also be used to pay down debt.

The separation of Activision from Vivendi is a "win-win," wrote analyst Colin Sebastian of Robert W. Baird after the news broke. "We believe this is a more favorable outcome for Activision shareholders than the alternative 'special dividend' or sale of Vivendi's shares to an alternative strategic buyer," Sebastian added.

Activision Blizzard appears on a daily ranking created with StockScouter, an MSN Money tool that identifies stocks with strong growth prospects in the near term. All stocks with Scouter ratings of 8, 9 or 10 are considered for the list, which is then shortened to exclude stocks with a trading volume below 50,000 shares a day. The remaining stocks are ranked on the basis of market capitalization, sector membership and whether they are growth or value stocks.

Kotick has been associated with Activision since 1990, when he and Kelly bought a 25% stake in the video-game company. Kotick was named chief executive the following year.

This week's buyout ends months of uncertainty for Kotick and other Activision employees, who were well aware of Vivendi's intention to extract cash from its Activision investment as management focuses on a sweeping restructuring, announced a year ago, under pressure from shareholders who want a more streamlined company focused on media content.

In a statement, Kotick said the deals represent "a tremendous opportunity" for Activision Blizzard and its shareholders, including Vivendi, and establish an "independent company with a best-in-class franchise portfolio and the focus and flexibility to drive long-term shareholder value and expand our leadership position as one of the world's most important entertainment companies."

With independence assured, Kotick is free to focus on the introduction later this year of new Xbox and PlayStation consoles, from Microsoft (MSFT) and Sony (SNE), respectively, that some analysts predict will be the last generation of game consoles. (Microsoft publishes MSN Money.)

Console games accounted for about 43% of Activision's sales in 2012.

Activision Blizzard has a StockScouter rating of 10, meaning the stock is expected to significantly outperform the broader market over the next six months with less than average risk.

General Growth Properties (GGP)

Here at MSN Money, we think our StockScouter rating system is about as good as it gets when you're trying to decide where to invest. StockScouter looks for stocks whose business fundamentals, price behavior, valuation and stock-ownership characteristics appear to predict a rising price in the future, based on how those factors have influenced stock prices in the past.

The system assigns each stock an expected six-month return and balances that return against the stock's expected volatility. Scouter rates stocks on a scale of 1 to 10, and ratings can change daily. Ratings and data in the chart above were current as of this article's publication date.

In addition to the daily top 10 list described above, StockScouter is used by investment research firm Verus Analytics (previously known as the quantitative business unit of Gradient Analytics) to generate a monthly benchmark portfolio of stocks that, refreshed monthly, has outperformed the market since its inception in August 2001.

An investor who began in 2001 by investing in each of the benchmark portfolio's top 10 stocks at the start of the month, selling them at the end of the month and then starting fresh with a new group of 10 stocks, would have generated returns, before trading costs and taxes, of 892% through June 30, 2013.

Writer Jon Markman, at the time a columnist for MSN Money, collaborated with company researchers on the tool. Markman suggested rolling over the top 10 stocks every six months to hold down trading costs, a strategy that might be a better fit for most investors; that would yield different results, which would vary based on your starting point.

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Why Generation Y fears the stock market

9:00 AM Fears, Generation, market, stock No Comments

| By J,J. Zhang, MarketWatch

For Millennials, financial security is a fragile hope amid high educational debts, stagnant upward mobility and poor employment prospects.

One of the largest transfers of wealth between generations is starting to occur in the U.S. As baby boomers enter the retirement phase, the next generation of workers, Gen Y or the Millennials (those born in the 1980s and 1990s), are now entering the workforce and beginning their prime earnings phase.

According to research firm Iconoculture, Gen Y comprises over 76 million people with almost $900 billion in spending power. In contrast the baby boomers, also numbering 76 million, have $2.5 trillion in spending power.

However, for this new generation, it's a very different world than the one seen by their parents. The baby boomers saw the rise of the U.S. into the world's only superpower and all the accompanying economic growth and rewards that came with it.

They reaped the rewards of the chemical revolution, the golden age of manufacturing, the computer revolution, the information age, energy abundance and globalization. They also juiced growth via the use of debt which turned the U.S. into today's debtor nation.

In contrast, the future outlook for Gen Y is that of a nearly bankrupt nation, rising global competition from emerging countries, crumbling infrastructure and insolvent retirement and welfare programs, among other ills. For this generation, financial security is a fragile hope due to high educational debts, stagnant upward social mobility and poor employment prospects.

For Gen Y, it becomes even more important to start retirement planning early as government Social Security guarantees, employment security and wage-growth prospects will not be what their parents experienced.

However, this generation has also suffered through several financially traumatic experiences that have and are continuing to shape its investing views.

Baby boomers saw a relatively stable and strong growth period during the '50-'70s which influenced their long-term belief in market returns. In contrast, Gen Y adults experienced two major bubbles and recessions and high volatility, which have led to one lost decade already.

Indeed, the early vanguard of the Gen Y'ers joined the real world only to experience the dot-com crash. They subsequently started investing in their mid 20s only to find the housing bubble and the subsequent great recession. The first impression is the most important and so far it doesn't look promising.

This lack of tangible gains, roller-coaster volatility and recent scandals such as the bank bailouts, mortgage shenanigans, Ponzi schemes and scandals like Goldman's designed-to-fail securities have all made them cynical and distrusting of the stock market and investing in general.

This isn't hypothetical. In a recent MFS Survey, 40% of Gen Y agreed with the statement "I will never feel comfortable investing in the stock market." Among Gen Y investors, 54% feel overwhelmed by available choices and 47% tended to put off investment decisions.

Due to fear of risk, 30% said their primary investing objective is protecting principal and have allocated an average of 30% to cash, more than other age groups, and nearly equal to the 33% allocated to stocks. T. Rowe Price noted in 2010 that almost one in five self-directed participants age 25-35 had over 80% of plan assets in cash.

While protecting principal is no doubt important, excessive risk aversion does not lend well to long-term investing: after all, no pain, no gain. With 54% of Gen Y concerned about when they would be able to retire and 44% lowering their retirement expectations, they need to put aside their fears and tiptoe back into the markets.

Though these psychological traumas have already influenced Gen Y actions, luckily time and youth is on their side. With the first wave still in their early 30s, there's still plenty of time to start and let compound investing work for them.

The important first step is learning to let go of their fear of the market, or at least reduce it to a healthy level. Yes, the stock market can be a scary place sometimes, but there are precious few ways to generate returns significantly above inflation -- a necessity in a Social Security-less future.

Notably, high volatility and risk averseness have caused Gen Y to make more use of financial advisers and other experts. Especially for those concerned about market volatility and risk, seeking a financial adviser to help them tiptoe into investing is a good idea.

However, it's particularly important that one find a good and trustworthy adviser -- those with fiduciary duty is a must. While advisers do charge fees that can undermine returns, in this case it's still a net positive over the high cash many Gen Y'ers are holding.

And keep in mind; advisers are not a lifetime commitment. There's nothing wrong with learning from them and then striking out for yourself.

One trait of Millennials is their considerable sophistication in finding information and learning for themselves. The widespread availability of financial products and services such as ETFs, online discount brokerages, instant financial info like real time quotes and new tools such as computer-aided rebalancing have given then all the help needed to create a well-rounded and diversified portfolio ready for the long term.

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Zuckerberg donates $500 million in stock to charity

2:30 PM charity, donates, million, stock, Zuckerberg No Comments

Ben Popken , NBC News contributor

It's quite the Christmas gift. Facebook's CEO Mark Zuckerberg says he is donating nearly $500 million in company stock to charity in order to promote education and health initiatives.

A Facebook spokesperson confirmed to NBC News the gift of 18 million shares valued at their Tuesday closing price of $498,780,000. The sum was first announced by Zuckerberg via a status update on his Facebook page on Tuesday. The recipient is the nonprofit Silicon Valley Community Foundation, which helps donors manage and identify charitable funds that are in line with their philanthropic passions.

This gift is Zuckerberg's biggest ever. Before Facebook went public in 2010, he gave $100 million in company stock to Newark, N.J., public school districts. That same year, he signed The Giving Pledge, an effort led by Microsoft founder Bill Gates and investor Warren Buffett, where the world's wealthiest individuals commit to giving away most of their fortunes to charitable efforts.

In the status update, Zuckerberg wrote that the donation was " in order to lay the foundation for new projects" and that he is "hopeful we'll be able to have as positive an impact in our next set of projects."

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Yelp shares surge as insiders hold on to stock

7:30 PM insiders, Shares, stock, surge No Comments

Shares of consumer reviews website Yelp Inc recorded their biggest one-day advance on Wednesday, the day insiders were free to sell their holdings, surprising investors.

The stock rose 20 percent to $21.84 with more than six-and-a-half million shares traded, putting it on track for its busiest day since its debut in March. Shares rose as high as $22.89, and the rally briefly bumped the stock back above its debut price of $22.01 a share.

Part of the stock's rise may be related to the relatively high percentage of shares being borrowed for shorting purposes. About 97 percent of the shares available for borrowing for short bets were borrowed. This only amounts to about 4 percent of the total shares outstanding, according to Data Explorers, a Markit company.

"I haven't seen a good old-fashioned tech short-squeeze in a long time, but this has all the behavior of that," said Mike Shea, managing partner and trader at Direct Access Partners LLC in New York.

About 53 million shares were eligible for sale at the end of the lockup period. Similar ends to restrictions on selling by insiders and underwriters have pressured other technology companies. Facebook Inc was hit hard after its initial lockup period ended two weeks ago.

"People felt it would be a lock - pun intended - that you'd see the stock get hit when the lockup ended, and that clearly didn't happen," Shea said. "So now everyone is running for cover."

With the stock shooting higher, shorts may have been forced to cover their bets to avoid the short squeeze that costs them more money, and apparently added to a sharp upward movement in a stock's price.

The advance comes in contrast to other social media stocks, including Facebook and Groupon Inc , both of which have struggled to convince investors that they will be able to monetize their user bases. Facebook, in particular, faces questions over its mobile platform.

Yelp, in comparison, earlier this month raised its revenue outlook and posted second-quarter earnings and sales that beat expectations as it signed up more advertisers and expanded into new markets.

"There's a different mentality for Yelp than Facebook, and I'm not surprised that having a bigger float of shares is interesting buyers today," said Todd Schoenberger, managing principal at the BlackBay Group in New York.

Facebook, in results released last month, posted a dramatic slowdown in revenue growth and alarmed investors by declining to give financial forecasts. When the social media company's lockup ended last week, company director Peter Thiel cashed out most of his stake, selling about $400 million of shares.

Groupon similarly disappointed in its results, contributing to a sell-off that put the provider of daily deals off almost 84 percent from an all-time closing high reached in November.

Copyright 2011 Thomson Reuters.

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UPS sees slower growth; stock falls

2:00 AM falls, growth, slower, stock No Comments

Shares of United Parcel Service sank 4 percent to just below $75 Tuesday after the world’s largest package-delivery company reported a drop in international package sales, which pulled quarterly earnings below analysts’ estimates.

Seen as a bellwether for the U.S. economy because it ships all sorts of products, UPS cut its full-year earnings forecast, citing a weakening global economy for the remainder of the year. The Atlanta- based company also reported second-quarter earnings that fell short of Wall Street expectations.

“Increasing uncertainty in the United States, continuing weakness in Asia exports and the debt crisis in Europe are impacting projections of economic expansion,” Scott Davis, chairman and CEO of UPS, said in a statement.

“Throughout its history, UPS has maintained its strength in all economic cycles and we are making the adjustments necessary to respond to today’s challenging conditions,” Davis added.

Donald Broughton, a transportation analyst at Avondale Partners, says UPS is suffering from the economic difficulties now plaguing Europe, where UPS derives 14 percent of its revenue. Package volume is down 3 percent in the region, and pricing is down over 5 percent, he said.

“You just can’t face those kinds of headwinds when that’s 14 percent of your revenue and still bring the bottom line number home,” he told CNBC.

The recent UPS deal to acquire European package carrier TNT Express will double the company’s exposure to Europe, Broughton said, and it could prove to be a thorn in the company’s side.

“So they’re doubling down on a bet on an economy that’s decelerating,” he said. “That doesn’t bode well for the stock in the near and the intermediate term.”

Broughton said he prefers shares of shipper FedEx, which has greater exposure to Asia and is trading at “a severe discount to UPS.”

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Google to split stock; announces dividend

1:24 AM Announces, dividend, Google, split, stock No Comments

Google, explains its stock split. Also, what the company is doing to maintain the passion of a startup, with CNBC's Jon Fortt. David Garrity, GVA Research, also weighs in on some of the highlights from the call.

Google announced plans to give investors a stock dividend on Thursday, as the search giant reported first quarter that met Wall Street estimates.

Google said its board of directors has approved a dividend of stock to existing shareholders that it calls a 2-for-1 stock split, preserving its corporate and control structure.

The announcement came as Google co-founder Larry Page completed a year after his return as chief executive.

Shares of Google, which finished Thursday's regular session at $651.01, rose to $655 in after-hours trading.

Net revenue, excluding fees paid to partner websites, totaled $8.14 billion in the three months ended March 31, compared with $6.54 billion in the year-ago period and analysts' average estimate of $8.15 billion according to Thomson Reuters I/B/E/S.

Net income was $2.89 billion, or $8.75 per share, compared with $1.80 billion, or $5.51 a share, in the year-ago period when Google took a $500 million charge to settle a government probe into its advertising practices.

Since taking the reins one year ago, Page has cut back on extraneous projects, launched a social networking service to challenge Facebook, and signed a $12.5 billion deal to acquire smartphone maker Motorola Mobility Inc.

Breaking down the details of Google's earnings announcement and the board's decision to approve a 2-for-1 stock split, with Herman Leung, Susquehanna Financial group analyst; David Garrity, GVA Research principal; and CNBC's Maria Bartiromo and Jon For...

Copyright 2011 Thomson Reuters.

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Is Google getting ‘evil’ with its stock split?

3:20 PM getting, Google, split, stock No Comments

Paul Sakuma / AP

Workers ride bikes outside Google headquarters in Mountain View, Calif.

With its controversial new stock plan, Google may be going against its “don’t be evil” informal corporate motto.

The company announced a stock split Thursdaydesigned to preserve the control of co-founders Larry Page and Sergey Brin over the world’s leading Internet search engine. It lets Google issue new shares without diluting the two founders’ voting power, creating a new class of nonvoting shares that will be disseminated to existing shareholders in what is basically a 2-for-1 stock split.

Since it first went public in August 2004 in what was one of Silicon Valley’s most anticipated and debated initial offerings of stock, Google has operated with a dual stock ownership structure, where a company issues two classes of shares with different voting and ownership rights. The system allows the company’s founders and management to maintain control, but still solicit investments from the public.

Google’s stock structure has worried corporate governance experts, especially since the format has been adopted by a number of the new Internet technology firms now launching IPOs, including Facebook. Now Google has upped the ante by adding a third class of non-voting shares.

These experts say investors may be willing to ignore the corporate structure now because they are eager to purchase a hot Internet stock. They warn that if there is a crisis for the company down the road, investors will not have much of a say in its fate.

Page and Brin, together with Chairman Eric Schmidt, own about two-thirds of Google’s voting power. The company’s Class A stock has less voting power. The new type of shares, Class C, will have no voting rights at all.

“If you’ve invested in Google, you’ve known from the beginning that you’re a second class shareholder,” Mark Mahaney, an analyst with Citigroup, told CNBC Friday. “They’ve just made that a little more apparent.”

Wired Magazine’s Senior Writer Steven Levy said the stock plan may be Google’s way to send a signal to the market that it is ready to take on the new crop of internet companies now coming to market, especially Facebook, Levy said.

“Google is trying to send a message,” he told CNBC. “They’re saying we do have tricks.”

The stock structure adds to the lack of decision making on the part of investors Google, and it would likely have to be approved by Google’s board, Levy said.

“But Google’s board may be less independent than others,” he said, noting that Page and Brin hold 70 percent of the voting rights.

“Anything that happens at Google happens because [Larry] Page and [Sergey] Brin agree on it,” he said.

Google said Thursday it instituted its original dual-class structure to help it build a company designed for stability over long time horizons. That takes time and requires stability and independence, the company said.

“We recognize that some people, particularly those who opposed this structure at the start, won’t support this change -- and we understand that other companies have been very successful with more traditional governance models,” the company said in a letter to shareholders.

“But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users,” Google said.

Google shares were down about $21, or 3 percent, in midday trading after the announcement, to about $630 a share.

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Pre-IPO stock trading a minefield for investors

7:12 AM investors, minefield, PreIPO, stock, trading No Comments

The voicemail from Felix Investments broker Jared Carmel sounded like a typical cold-call from an aggressive stock salesman.

"What's interesting is some of the access to opportunity that we have, i.e. companies like Groupon, Facebook, we had LinkedIn before the IPO, things of that nature," Carmel told a prospect he had never met, according to court documents.

"So if you have a moment or two, if you could give me a buzz, I'd love to touch base."

But Carmel, who does not dispute making the call, was touting companies that were not publicly traded. His employer, Felix Investments, was not a typical investment firm, but one capitalizing on a new and rapidly growing realm for U.S. markets: trading in the shares of privately held companies.

It hasn't taken long for that business, super-charged by the hunger for Facebook shares, to become problematic.

At issue is the lack of protection for investors who are largely investing blind. They are often not getting basic financial information about the companies they are investing in and have precious little knowledge about some of the vehicles they are investing through.

Felix and co-owner Frank Mazzola were sued Wednesday by the Securities and Exchange Commission, which accused Mazzola of taking hidden commissions and misleading investors about how many Facebook shares Felix funds had been able to buy.

Carmel's phone message had surfaced in a now-settled lawsuit by his former employer, Advanced Equities, which objected to him calling its customers after joining Felix. Carmel, who is not accused of any wrongdoing, said in an interview that he was not selling anything at the time. "I didn't know them," he acknowledged, but added: "It was just to introduce myself."

Also on Wednesday, one of the largest exchanges where pre-initial public offering stock can be traded, SharesPost, was censured by the SEC and fined $80,000. Executives at Advanced, which is also a big reseller of stakes in private companies, are also likely to face enforcement action, according to records on file with the Financial Industry Regulatory Authority.

Market ripe for abuse
Regulators and some securities attorneys warn that those actions won't do much to tamp down an exploding market that is ripe for abuse.

They also say a package of proposed laws that has passed the House and drawn support from some Senate Democrats and the Obama administration would make fraud easier by allowing advertisements for private stock sales and raising the maximum number of investors to 999 from 499 before public financial filings are required.

"At a time when you have a record number of scams going on in private placements and hurting people, you are rolling back the protections. You are simplifying fraud," said Lynn Turner, a former chief accountant at the SEC who is now managing director at consulting firm LitiNomics.

Many Silicon Valley investors support loosening regulations to make it easier for private companies to raise money.

But others warn that Congress is headed toward helping to inflate a bubble in private stock. "If these markets don't get more regulated - which I think is a reasonable thing to do - they are almost certainly going to get shut down" in the wake of scandal, said Scott Sandell, a general partner at big venture firm New Enterprise Associates.

Last year, some $9.3 billion in stock in private companies changed hands, up four-fold in two years. Ownership in such companies was historically limited to venture capital funds, wealthy angel investors and early employees, but the emergence of private exchanges for non-public shares has changed the game dramatically.

The private sales, which allow employees and early investors to cash out before a public offering, don't come with anything resembling the disclosures required with an IPO. In most cases investors see hardly any financial information.

The trading can also serve as a form of guerilla marketing, as reports of escalating valuations in private deals drive anticipation of a future debut on the public markets.

Most CEOs - who are barred from hyping the prospects of their companies after they begin the IPO process - are glad that resellers are pushing their valuations up, said Geoff Yang of venture capital firm Redpoint Ventures, who sits on a dozen boards.

In the most prominent example, Facebook shares have continued to move higher in auctions on SharesPost, even though Facebook is in a mandated pre-IPO quiet period and the company can't boast of its prospects without elaborate disclaimers. SharesPost, which has more than 60,000 registered users, agreed to pay the $80,000 SEC fine over its failure to register as a broker-dealer before late last year.

Regulators say that there has been no rash of investor complaints only because most pre-IPO stocks have gained value since their purchase amid a broader rally in U.S. equities. When that changes, lawyers could challenge the legality of the transactions.

In the meantime, securities law experts and veteran Silicon Valley investors say operators like Felix are gaming the system with tactics such as creating limited liability companies to hold the private shares and then selling interests in the LLCs. That sidesteps regulations barring resale of the stock itself for six months or more.

"You have got to worry about the fly-by-night operations," said Ian Sobieski, managing director of the Band of Angels venture fund and an investor in SharesPost. "They are doing a work-around of the SEC rules."

Special rules for the rich
The nation's major securities laws were enacted after the 1929 stock market crash and a wave of interstate investment scams that bankrupted thousands of smaller investors. The laws generally forbid companies from selling stock to the public without SEC-reviewed and audited disclosure of their finances and business risks.

There are some important exceptions, most notably the use of unadvertised private placements in which so-called accredited investors can buy shares. Individuals must have a net worth of $1 million or earn more than $200,000 ($300,000 for couples) to meet the standard for being accredited, though in most cases no proof is required. The assumption is that wealthy investors can fend for themselves.

The best-known means of selling private stock are SharesPost and New York-based SecondMarket. SharesPost, based south of San Francisco in San Bruno, was founded in 2009 and said it did $184 million in transactions last quarter with a matchmaker approach for buyers and sellers.

SecondMarket, which said it is not a subject of the SEC probe, began offering a trading platform for private stock in 2008, and processed more than $500 million in such deals last year.

Both work closely with the companies whose stock they deal, and SecondMarket won't allow any transactions in shares of companies that object.

SecondMarket said a third of its sales volume last year came from "asset managers," including funds dedicated to buying up a single company's stock. Another 9 percent came from funds devoted to owning stock in a series of private companies.

Gary Ream, a sporting goods executive who invested $100,000 through Felix for Facebook shares in early 2010, said he never saw any financial statements from the company. Instead he listened to a telephone presentation by Felix and followed his gut instinct. "We sat through a conference call and they laid out where they were," he said. "It was not typical financials that you would see."

Mazzola says that Felix does not claim to have any special access to inside information for its clients. "The traditional due diligence doesn't exist," Mazzola said.

In some cases, the secondary funds can't even assure investors that they will be able to buy the stock that they are seeking. In Felix's case, according to the SEC suit, the company's "false and misleading solicitations" included claims that it was buying Facebook shares at $66 when that deal never closed. Mazzola didn't respond to questions about the suit.

Among Felix's potential customers is Pre-Game Partners LLC, created in December by investment bank Laidlaw & Co (U.K.).

According to its confidential offering memorandum seen by Reuters, the fund said it plans to spend as much as $2.5 million on a stake in a Felix fund holding Twitter shares. It also said it intends to buy stakes in private companies "such as Foursquare Labs Inc, Palantir Technologies Inc, ZocDoc Inc, Liquidnet Holdings Inc, Kabam Inc, Chegg Inc" and others, though no deals are signed.

'Horrendous investments'
Pools created without guaranteed holdings "have always turned out to be horrendous investments," said former SEC accountant Turner. "I can't comprehend why any investor would go into that."

For now, SEC rules clearly prohibit general solicitation for private stock sales, though not all-purpose introductions. Felix executive Carmel's phone message surfaced in a now-settled lawsuit by his former employer, Advanced Equities, which objected to him calling its customers.

Felix and two of its three largest owners, Mazzola and William Barkow, along with Vice President of sales Emilio DiSanluciano, settled FINRA's accusations. The men agreed to fines totaling $80,000 and suspensions from the industry for two to three weeks.

FINRA said they had cold-called investors and sent mass emails without learning whether their funds would be suitable investments for the recipients. It also said a "Facebook Due Diligence Report Presented by Felix Investments," which it sent to 125 people, "was only based upon favorable, publicly available information" and that it failed to disclose that Felix had no access to Facebook financial data or management.

Barkow has left Felix and did not return calls seeking comment. DiSanluciano likewise didn't respond to messages.

In an interview before the SEC action, Mazzola maintained he had acted appropriately. "If there was something of real concern, they would have shut us down a long time ago," he said. "We haven't defrauded anyone."

Though Felix is accused of flouting several securities laws, many more brokers that are being more careful could still leave investors badly burned, venture capitalists and lawyers warned.

"There is a nearly infinite variety of things that could be wrong with a private company that you don't know anything about," said Robert Robbins of Pillsbury Winthrop Shaw Pittman, who teaches an annual joint course on private stock sales for the American Law Institute and American Bar Association.

"Environmental claims, labor claims, trademark claims. You've never seen their accounting, so you can't even know if you feel good about their financial statements."

Those pushing the envelope in selling secondary market interests have overlapping histories.

For example, Felix vice president DiSanluciano worked at J.P. Turner of Atlanta - which operates 200 retail brokerages nationwide - for eight years, through the end of 2009.

Turner made a $25 million Facebook fund offering, according to media reports, saying it would collect 12 percent in fees and could not guarantee that it would obtain the shares. It is unclear whether the offering was ever completed. Turner representatives declined to comment.

Turner has had repeated run-ins with regulators and unhappy clients. In 1998, Arkansas regulators issued a cease-and-desist order to the firm after an agent told a customer that shares in a pre-IPO company called Cartoon Saloon would quintuple when the company went public.

In 2006, Turner paid $195,000 and agreed to a consent order with New Jersey regulators who found that its agents had engaged in unsuitable trading for clients and misled them about risks. The same year, the National Association of Securities Dealers fined Turner $211,000 after two brokers sold private placements in a hedge fund without disclosing the commissions they would get from trading in its accounts.

Current Felix executives Mazzola and Carmel used to work at Laidlaw, home of the Pre-Game Partners fund. They and former executive Barkow also previously worked at Chicago-based venture banker Advanced Equities, which is known for paying a premium for stakes in companies that have run into difficulty and may never go public. Unlike most venture firms, which raise money and then decide where to invest it, Advanced Equities buys stakes, adds commissions and resells to its clients.

In one spectacular case, the company raised more than $20 million and took a 12 percent commission as the main backer of a company called Pixelon, which a 1999 offering memorandum said was patenting a revolutionary means for sending video over the Internet.

Pixelon blew more than $16 million on an all-star concert with The Who rock band that was meant to showcase the transmission capability. The broadcast failed, the technology turned out to be cribbed from others, and the company's CEO was soon found to be a convicted fraudster who was on the lam. The CEO was arrested and returned to jail.

Advanced Equities and three of its leaders later joined three Pixelon representatives in settling an investor class-action suit for $2.6 million, though executives said Pixelon's insurance company picked up the tab.

Those settling included Advanced Equities co-founders Keith Daubenspeck and Dwight Badger, who received so-called Wells Notices from the SEC this year warning of likely enforcement action over a private 2009 offering.

Daubenspeck didn't respond to an interview request. "We don't have any comment at this time," Badger said Wednesday.

Copyright 2012 Thomson Reuters.

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Big exchanges to battle for Facebook’s stock

7:42 PM battle, exchanges, Facebooks, stock No Comments

By msnbc.com news services

When Facebook goes public in a few months, will the social media giant decide to list its stock on the New York Stock Exchange or the Nasdaq?

Given that stocks listed on the Nasdaq also trade NYSE, and NYSE-listed companies trade on the Nasdaq, the question is somewhat moot.

What’s more important is the image the company will project with its listing decision. By choosing the tech-heavy Nasdaq, it might be aiming to attract investors interested in the likes of Apple, Amazon.com or Google. If it wants to project a more blue-chip image, like that of a Microsoft or Intel, it may choose the NYSE.

Another important consideration is listing fees, according to CNBC’s Kayla Tausche. The NYSE charges an initial $250,000 and an annual fee for trading of as much as $500,000, Tausche said, while the Nasdaq asks for $225,000 up front and as much as $99,500 annually.

Both exchanges will be doing all they can to woo one of the most talked about IPOs in recent memory, Tausche reports.

The Wall Street Journal reported Monday that online-review compiler Yelp has opted to list its stock on the NYSE. Last year, the Big Board grabbed new tech listings LinkedIn and Pandora, while archrival Nasdaq managed to acquire the listings for Zillow, Groupon and Zynga, the paper said.

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