Can Goldman Sachs Short Facebook?

Despite the fact that the hot social networking giant Facebook [FB] is not a public company it trades on secondary markets. The sellers in these markets are often former employees of co.’s like Facebook and accredited-investors trying to unload their holdings.

The non-public market value of Facebook most recently got a significant hit when a group of shareholders wanting to unload $1 billion worth of the company’s shares had to lower their selling price. The suggested FB valuation from that trade position went from $90 billion to $70 billion. While that’s still well above the $50 billion theoretical market valuation put on the social network when it raised money from Goldman Sachs and Digital Sky Technologies in January, the reposition outlined growing concerns among shareholders that Facebook’s market valuation can’t sustain its growth. This introduces a significant question: can you short Facebook?

According to CNBC’s John Carney, there is one company that probably can short Facebook—Goldman Sachs (GS).

As  mentioned above, earlier this year Wall Streets most powerful firm invested around $450 million in Facebook.

[From CNBC]: ” A Goldman run hedge fund that trades client funds reportedly was responsible for $75 million of that amount.

At the same time, Goldman created a specialized, “single-serving” fund to allow clients to invest in Facebook. Reportedly, the fund will have the right to invest up to $1.5 billion in Facebook.

The existence of these two client funds may allow Goldman not only to zero out its exposure to Facebook—they could allow Goldman to short it. The zeroing out part is easy. Goldman just sells all of its own shares to the hedge fund or the single-serving fund.

But it could go further by selling either of those funds a right to acquire shares that it does not yet own—essentially an options contract between Goldman and the funds it runs for clients.”

Carney points out that if Goldman combined these two strategies—selling all of its shares and selling rights to shares—it would wind up with a short position on Facebook. Basically, it would be betting that it could buy shares at lower cost in the future than when it sold the options.

Would this be legal? It’s not fully clear. Legal experts [Carney] spoke to say that “the law is very under-developed in this area.”

Carney also notes that Goldman most probably won’t start shorting Facebook any time soon. “But it may decide to reduce its overall exposure to Facebook for prudential, hedging reasons—something it has explicitly warned investors it has the right to do.”

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