Facebook Day Trading?

From Jim Stoll, September 7, 2012

Mr. Treneff,

Thank you again for your timely response to my records request. You've answered each of my three separate requests within 48 hours, which is a really great turnaround, so thank you for all your hard work.

Here is some of what you wrote in response to my records request:

"You asked for the specific time of day that STRS Ohio sold 2,175,000 shares of Facebook stock on May 18. These shares were not all sold at once. There were six separate “sell” trades of Facebook shares executed during the day— each at a profit above the price we initially purchased these shares at. The times and prices are listed below:

1. Sold 1.5 million shares at 11:30 a.m. @ $42.00 per share
2. Sold 300,000 shares at 11:32 a.m. @ $40.50 per share
3. Sold 50,000 shares at 11:36 a.m. @ $40.00 per share
4. Sold 50,000 shares at 11:43 a.m. @ $41.00 per share
5. Sold 150,000 shares at 1:50 p.m. @ $39.59 per share
6. Sold 125,000 shares at 3:35 p.m. @ $38.37 per share

It is really scary that I wasn't too far off when I detailed in my last email that STRS Investment staff must have DAYTRADED $86,000,000 in Facebook stock, in the first 14 minutes of the May 18 trading day. In fact, from your information above, the STRS Investment Staff sold 1.9 Million Shares of Facebook in the first 13 Minutes of the Trading day. While I'm thrilled that we didn't lose money on the DAYTRADE, I'm really upset that, if the STRS Board and Investment staff's philosophy that day was to execute a "DAYTRADE," then why didn't we liquidate the entire position and realize a profit of over $12,000,000. Had we sold the entire position when we sold 1.5 million shares we would have realized a net of $126,000,000 on our investment of $114,000,000.

That total would far exceed our stated goal of realizing 7.75% return on investment. The trade would have realized that goal in a day instead of a year. It certainly appears to this stakeholder that Mr. Mitchell and Investment staff were playing Russian roulette with our money that day. Further, by hanging onto 825,000 shares that day and thru subsequent trading, we now have a unrealized NET LOSS of $5,600,000 in our Facebook position. Had we sold our entire position we would have realized a huge profit. It appears that the investment staff was basing their trades on opportunity for PBI Bonus and betting our hard earned money that the stock would "pop" instead of fizzle in days after the IPO. It appears that we didn't sell the entire position simply out of greed by investment staff in the interest of them making their PBI Benchmarks, instead of the interests of the Stakeholders.....Even the appearance that this creates to this stakeholder should be enough for the STRS BOARD to adopt and explore guidelines or prohibitions regarding DAYTRADING by investment staff.

I think most would agree that DAYTRADING should never be part of a pension fund's investment strategy unless clearly stated in STRS literature (of which there is no mention in anything I could find) or that DAYTRADING is an acceptable practice to the STRS Board? Can you please point me to anything in the STRS Board Policy or Philosophy on investments where Daytrading an investment is an acceptable or encouraged practice?

I would request that you and the STRS Board inform all STRS constituents of the fact that Investment staff engaged in the practice of Daytrading of $114,000,000 in this particular instance. I would further request that while you may let constituents know that the Daytrading that day realized a profit, had we sold the entire position the profit would have been nearly double the amount we realized and also inform them that subsequent trading of Facebook stock actually leaves us with a 5.6 million unrealized loss as of today.

Sincerely,
Jim Stoll
Sycamore Schools

From Nick Treneff, September 7, 2012

Mr. Stoll, Please see the attached document in reply to the questions you sent in the email below. If you have any further concerns, please let me know.

Thanks,
Nick Treneff

From Jim Stoll, September 5, 2012

Mr. Treneff,

Thank you for responding to my inquiry. I've attached your response at the bottom of this email for all to see.

I would like to make another Public Records Request. That you provide me with the Specific Time of Day in which the Sale of our 2.1 million shares of Facebook took place. It wouldn't surprise me to find that the sale took place probably in the first 14 minutes of the trading session which began at 11:30 AM on May 18, because of the glitch in the NASDAQ system.

Nick, Actions speak louder than words. Holding a stock for less than 14 Minutes, or even most of the day, and putting $114,000,000 million dollars Risk" on a Daytrade" is not the actions of a long - term investor. If you want to see what our investment staff was looking at that day, and the wild, volatile ride the Stock took that day I encourage you and all to watch this link.. http://www.youtube.com/watch?v=XPNDKfCLPyo

I'd specifically request that those with a legal (Mr. Neville) and Fiduciary duty, (The STRS Board and Mr. Nehf watch the above video. You will see exactly what our investment staff and Mr. Mitchel, were looking at that trading day and JUST HOW RISKY IT WAS THAT WE DIDN'T LOSE MILLIONS OF DOLLARS IN MINUTES..... Watch it and then tell me if you believe what you wrote below.....

The link above shows how unbelievably SCARY this investment was that day..... Watch this video of the chart /time of Facebook stock that day and then defend your statement on this investment...... You simply can't have it both ways. How many other times has Investment Staff held and sold a stock with $114,000,000 dollars at risk, in a 14 minute time period?? This is scary at best and borders on an activity that should at the very least be called "EXTREMELY HIGH RISK,"..... there is absolutely nothing "long term" about it.

While I realize we have lost in excess of 6 million on our Facebook investment, the information you provide below, relative to my records request, begs many more questions of our Investment Staff than it answers. As stated above, I would like to make another records request as to the specific time of day in which the sale of the 2.1 million shares was executed.

Let me detail my concerns. Obviously someone on the investment staff had to be closely watching Facebook stock on May 18 with their finger on the sell button. My questions are as follows......

1) What was our strategy that day? Did we have established parameters or profit that we would sell at and capture substantial gains?

2) As you are aware the Stock reached a high of $45 that day. Why didn't we sell at $45 and capture an additional $3.68 per share and on 2.1 million shares that would have been an additional gain of $7,728,000. This is why I request the specific time of the sale. Did our investment staff sell our position on the way up? If we had a specific price target in mind and said if we can capture 2% of our investment in ONE day lets take it, then the sale, while still unbelievably risky, is understandable and probably from a profit standpoint even commendable that we made money. If we sold the stock as the price began to plummet that day from its high (which seems to be the case based upon the video evidence I provide above) then it would be evidence that our investment staff was simply greedy or trying to enhance their own PBI Bonus margins and not investing in the best interest of its stakeholders.

I would encourage the STRS Board and Executive Director Mr. Nehf to review Investment staff policy to be sure that $114,000,000 cannot be put at risk like this in the future. CALPERS Board has already instituted a policy which regulates investing in IPO's of certain types because of the Facebook trading debacle, I'd encourage STRS to do something similar.

Jim Stoll
Sycamore Schools

From Nick Treneff, September 5, 2012

Mr. Stoll,

STRS Ohio is a long-term investor. We constantly monitor the markets, and on rare occasions in which a stock does very well and exceeds our longer–term expectations within a very short period of time, we may prudently sell that investment. In all cases, investment decisions are made solely in the interest of our membership and in full compliance with the law.

Regarding the question from your Sept. 4 email, the net proceeds of the 2,175,000 shares of Facebook stock sold on May 18 were $89.8 million, or an average of $41.32 per share. As I noted in my Aug. 30 email, the purchase price of those shares was $38.

Thanks,
Nick

From Jim Stoll, September 4, 2012

Dear Mr. Treneff, Mr. Mitchell and Mr. Nehf,

I made a public records request last week relative to STRS and its large position of $114,000,000 taken in Facebook on May 17. Mr. Treneff was kind enough to immediately gather the requested information. His response is copied below this email. Subsequent to that request I made another records request for the specific dates of the buys and sells of the original 3,000,000 shares which we purchased on May 17.

It is extremely disturbing to someone who has paid into STRS for 28 years that our investment staff basically "Daytraded" over 95,000,000 dollars by taking such a large position in Facebook on May 17 and selling 2,100,000 shares less than 24 hours later on May 18. A trade of that magnitude and sale so quickly begs the question as to whether the investment staff was risking our money to achieve their own PBI Bonus benchmarks and not in the best interest of STRS Stakeholders. Additionally, it is equally surprising that we would sell an additional 700,000 shares within the next 10 days, with those trades at a substantial loss from their original purchase price and then to compound my confusion, of the STRS Investment Strategy, we then purchased additional positions later in June buying 343,000 shares at a price of approximately $33. We have lost over 40% of that investment with today's closing price of $17.73

As of August 30, 2012 when Mr. Treneff responded to my request our loss in Facebook stood at $5,600,000.

Since my writing, last Wednesday Aug. 29, Facebook has lost or declined an additional 7%. I would be interested in what research or information that our investment staff has, to continue to maintain our position in Facebook, when almost all analysts say that the stock will continue to decline. I might provide this link by CBS news as support of my theory that we would be well advised to sell our positions in Facebook as soon as possible. This article details that early facebook investors and Facebook employees are eligible to sell their stock on Oct. 29 and additional dates, which could flood in excess of 1.5 Billion shares into the market, further declining the stock price. The article was written this evening Sept. 4. http://www.cbsnews.com/8301-505245_162-57506114/when-facebook-insiders-employees-can-sell-stock/

Additonally, a Professor at Sacramento State, has estimated that Facebook stock could easily decline to less than 11 dollars per share in the next few months. Perhaps, Mr. Mitchel and staff could consult with him to check their analysis. There might even be a "bounce" in the stock tomorrow as Mark Zuckerberg stated just recently that he would not sell his stock for at least one year.

As our investment staff proved by Daytrading the stock originally, it was a risky at best position to take. As each day goes by the Risk in owning this stock, in my opinion grows greater. As our strategy with this stock wasn't and doesn't seem to be a "hold it for the long term or many years" it seems at least to this educator that we may want to get out now or reinvest at a more appropriate time if Risk/conditions and investment data were to change.

I, and I'm sure other stakeholders, would like to see an article in the STRS Newsletter detailing exactly what our strategy was in "Daytrading" such a large position and then what exactly our philosophy is in continuing to hold such a large position in the stock? Do we often Daytrade investments? How many other instances of this type of Daytrading has occurred in the past? I've never seen in any Board minutes or in the Board investment strategy posted on STRS website, where STRS Investment staff has taken such a large position and sold in such a short time frame.

Lastly, I request that STRS Stakeholders be made aware of this trade and our handling of it because the STRS board rarely if ever questions the investment staff on their purchases and sales. At least in the Board minutes that I have seen it says that "there were no questions from the Board" of investment staff....... If the Board doesn't question trades as "RISKY" as the one detailed above, they are not living up to their Fiduciary duties and it is becomes incumbent on Stakeholders like myself, to question such trades and it begs an answer from the Chief of Investments and Executive Director.

I look forward to hearing from Mr. Nehf and Mr. Mitchell regarding this email and specifically whether they will share news and details of this investment with Stakeholders.

Sincerely,
James Stoll
Sycamore Schools
STRS Stakeholder for 28 Years.
(See below Mr. Treneff's response to my records request)

From Nick Treneff, August 30, 2012

Dear Mr. Stoll:

I’m writing in response to your emails regarding STRS Ohio’s investment in Facebook. As you may recall, Facebook’s initial public offering in May 2012 was one of the most anticipated IPOs in Wall Street history. Many institutional and individual investors alike were anxious to take part in the IPO.

In May 2012, STRS Ohio purchased 3 million shares of Facebook (in the IPO) at $38.00 per share, totaling $114 million. With Facebook having a market cap of $50 billion, it is one of the largest public companies in the U.S. stock market. STRS Ohio’s initial investment would be appropriate given the company size. As you noted in your follow up email, STRS Ohio sold 2.8 million shares of the stock in May 2012 for $109.2 million, or $39.01 per share. This resulted in a realized gain of $2.8 million.

In late June 2012, Facebook was added to the Russell 3000 Index, the NASDAQ Composite Index and many other indexes. At that time, STRS Ohio purchased 322,600 shares of Facebook for the indexed portfolio for $10.7 million, or $33.10 per share. In addition, an external manager purchased 21,000 shares of Facebook for $682,000, or $32.45 per share. STRS Ohio currently holds 543,600 shares of Facebook with a purchase cost of $19 million, or $34.88 per share. At a current market price of $19.34 per share, this holding has an unrealized market loss of $8.4 million. When you calculate the $2.8 million gain (as noted above) from STRS Ohio’s May sale of the stock, our net involvement to date in Facebook is an unrealized loss of $5.6 million.

The Investment Staff Guidelines and Procedures require approval by the Director of Investments or an Assistant Director of Investments for a purchase exceeding $50 million. I confirmed that this requirement was met regarding the IPO purchase. Investment staff also kept the State Teachers Retirement Board and the executive director informed about the initial purchase.

STRS Ohio does not typically purchase and sell that large of an investment within a month; however, given the market action and a changing outlook in this specific stock, staff was able to act quickly and realize a gain on the shares sold in May 2012.

I believe this answers the questions from your emails. If I can provide any additional information, please let me know.

Best regards,
Nick Treneff
Communication Services Director