Wall Street investors aren't the only ones feeling the sting of Facebook's falling stock: So are some of the country's troubled government pension funds. Public employee retirement funds from around the country took part in the Menlo Park, Calif., social networking juggernaut's May 18 initial public offering and plowed millions of dollars into Facebook stock before its value plunged.
Facebook shares continued their decline Monday, falling to $17.73, or less than half their $38 offering price.
Although public pension funds staked only tiny portions of their multibillion-dollar portfolios on Facebook's fortunes, the stock's poor performance has added to the funds' woes.
Chronic underfunding and poor returns could lead pension funds to riskier investments such as hedge funds, private equity, commodities and real estate, or even cut retiree benefits.
Three pension funds have joined a class-action lawsuit against Facebook and its underwriters. The suit, filed in U.S. District Court in Manhattan, N.Y., alleges that lead underwriters led by Morgan Stanley gave only some select investors a heads-up that Facebook's revenue forecast had soured.
"We expect Facebook and the people who benefited from that sale to pay up," said George Hopkins, executive director of the Arkansas Teacher Retirement System, which lost about $2.9 million on about 142,500 Facebook shares it has kept from the IPO. The Arkansas teacher pension fund is part of a group of institutional investors that filed papers seeking to become lead plaintiffs in the case.
In Illinois, the exposure of two large pension funds was minimal or unclear.
The Illinois State Board of Investment, which manages funds for state workers, judges and lawmakers, said it has $105,000 in a mutual fund that has invested in Facebook. The Teachers' Retirement System invested in two private equity firms that invested in Facebook before its IPO. A spokesman didn't know how much money the firms had in Facebook.
The IPO was fraught with problems. First there was trouble with the Nasdaq Stock Market's trading system, which delayed the offering and botched early trading, costing brokerages an estimated $500 million. Then came revelations of selective disclosure about Facebook's declining fortunes. The stock has since languished and could see more pressure as company insiders become eligible to sell more than 1.2 billion shares later this year.
Facebook did not respond to a request for comment. But it tried to address worries about its stock by promising not to sell shares to cover a tax bill and saying it will let workers cash in stock weeks ahead of schedule, according to Reuters.
Pension funds don't plan to eschew future IPOs because of their experience with Facebook.
"We can't swear off of them entirely -- we'd be missing out on a big piece of the equity market," said Phil Kapler, head of the Fresno County (Calif.) Employees' Retirement Association, who noted that every public company at some point came to the market in an IPO.
Research by Jay Ritter, a professor of finance at the University of Florida, shows that average three-year returns of IPOs from 1980 until 2010 have underperformed the broader stock market by 19.7 percent.
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