[ by Larry Goldfarb ]

Mutual funds run by three of the banks that helped Facebook Inc. go public were among the first out the door when the social-network giant's stock began tanking.  During Facebook's May 17 IPO, mutual funds managed by Morgan Stanley, JPMorgan Chase & Co., and Wells Fargo & Co.—three of the 33 banks that were underwriters on the deal—bought 8.4 million shares of the company, worth $319 million.  By the end of the month, the funds had sold 3.5 million of them, according to a Wall Street Journal analysis of data from investment-research firm Morningstar Inc. and filings with the Securities and Exchange Commission.  During that period the stock dropped from a high of $45 on the first day to $29.60 by May 31. It closed Friday at $21.18.

Regulators have strict rules keeping banks' underwriting and asset-management teams separate, and there is no indication that these funds didn't do that.  Mutual funds can't buy IPO shares directly from their firm; they must go through another firm.  Nevertheless, the selling, which likely left the funds nursing losses, is unusual for some of the investors given their trading history, and shows how quickly the lack of confidence in Facebook spread throughout the markets.

That the funds could get out quickly illustrates the advantages that big mutual funds enjoy over individual investors.  Many discount brokerages exclude investors from future IPOs, either temporarily or permanently, if they sell an IPO shortly after buying the shares.  Typically, the penalties kick in if a client sells within 15 to 30 days.

For more information, please read [WSJ, 11/5/12].