Insight: Pre-IPO stock trading boom could be scary for investors

Thu Mar 15, 2012 4:03am EDT
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By Joseph Menn

SAN FRANCISCO (Reuters) - 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."   Continued...

Facebook Director of Marketing Mike Hoefflinger announces a new "Premium on Facebook" service as he delivers a keynote address at Facebook's "fMC" global event for marketers in New York City, February 29, 2012. REUTERS/Mike Segar