News Column

Scrutiny of Facebook IPO Builds

May 23, 2012

Matt Krantz and Adam Shell

Facebook

Fallout from Facebook's initial public offering intensified Tuesday as the shares plunged again, and more questions arose about whether the social-networking giant's IPO was handled properly.

Facebook shares fell $3.03, or nearly 9 percent, to $31 Tuesday, leaving them down more than 18 percent from the $38 offering price. Since the shares started trading Friday, a steady stream of negative news has plagued Facebook, centering on how the deal's underwriters and the Nasdaq stock exchange handled the highly hyped IPO. "Facebook's credibility has been further destroyed," says Francis Gaskins of IPOdesktop.com.

The Securities and Exchange Commission will look into how the market functioned with respect to trading in Facebook, SEC Chairman Mary Schapiro said as she left a Senate hearing Tuesday. The SEC did not announce a formal investigation.

Also Tuesday, the Secretary of the Commonwealth of Massachusetts subpoenaed Morgan Stanley, the lead underwriter on Facebook's IPO. The Secretary of the Commonwealth's office confirmed the subpoena but would not provide details.

The latest concerns center around whether a Morgan Stanley analyst lowered the forecast for Facebook's revenue in the days leading up to the IPO and gave that information only to select investors, says Scott Sweet of research firm IPOBoutique.com.

In an e-mailed response, Morgan Stanley flatly denied any wrongdoing: "Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations."

After Facebook filed a revised pre-IPO prospectus with the SEC on May 9 outlining its challenges in the mobile advertising space, Morgan Stanley sent a copy of the filing to all its clients, the firm's e-mail stated. A number of research analysts at several firms involved in the deal then "reduced their earnings views to reflect the new information," Morgan Stanley said, adding that those views were "taken into account" in the IPO pricing.

Meanwhile, a Facebook investor sued the Nasdaq OMX Group over trading glitches on the first day of trading, says Bloomberg News.

Whether the IPO's underwriters face legal liability is unclear. "We don't have enough information yet to assess the potential scope of liability," says Jacob Frenkel, a lawyer at Shulman Rogers and ex-SEC prosecutor. "We do know all conduct surrounding the IPO will be scrutinized by a powerful regulatory microscope."



Source: Copyright USA TODAY 2012


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