Facebook underwriters face investigation

Reports say updated revenue projections were not passed on to all clients

The Facebook IPO has seen an unusual amount of criticism and troubles. System troubles at NASDAQ not only delayed listing Facebook for 30 minutes, but also left many brokers unable to see their trades for two and a half hours.

Now there are reports Morgan Stanley, Goldman Sachs and other underwriters had updated their revenue projections for Facebook shortly before the company’s IPO, but that some of the underwriters told only certain large clients, resulting in potential selective disclosure.

As a result, some regulatory groups plan to investigate the allegations, investors have filed lawsuits and there has been significant criticism of the entire IPO process. All this could potentially affect investor confidence and, as a result, increase the difficulty for other companies planning to go public.

According to the reports, the underwriters had revised their revenue projections for Facebook after the company’s latest S-1/A, filed two days before the IPO. In it, Facebook notes that users were shifting to its mobile platforms ‘where our ability to monetize is unproven’, which might ‘negatively affect our revenue and financial results’.

In another development, Morgan Stanley reportedly told Facebook only days before the IPO that the market still had plenty of demand, leading Facebook CFO David Ebersman to increase the number of shares the company and insiders would sell. The extra volume could have been the difference between the almost immediate price degradation and a first-day pop that would have let institutional investors see some profit.

SEC chairman Mary Schapiro said in a Senate Banking Committee hearing that the commission will review ‘issues’ in the Facebook IPO with the aim of restoring public confidence in the markets. The SEC has declined to elaborate further but FINRA CEO Richard Ketchum has indicated that FINRA will look specifically at the disclosure allegations.

Some in government have moved even more aggressively. Massachusetts Secretary of State William Galvin issued a subpoena to lead underwriter Morgan Stanley for more information.

In addition to the regulatory interest, harsh criticism is flying. Financial TV personality and former hedge fund manager Jim Cramer called this ‘the most outrageous and egregious deal I have ever seen.’ Some shareholder groups have already filed lawsuits against both Facebook and some underwriters.

Even Congress has joined the pack, with the Senate Banking Committee and the House Committee on Financial Services mounting investigations.

The problem for IROs at other companies is that the entire situation has affected confidence on the part of retail and institutional investors alike, as well as companies that have considered an IPO. That could mean going public in the near future could be more complicated and face greater challenges than it did just a few weeks ago.

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