Morgan Stanley, which led the Wall Street effort to bring the social network public, came under fire following reports that the bank had told some favored clients that the bank was cutting its revenue estimates for Facebook. The lowered expectations came after the tech giant expressed caution in a public filing about its advertising sales on mobile devices.
The legal issue raised could be "securities fraud — plain and simple," said Ernest Badway, a securities lawyer in New York and New Jersey and a former enforcement attorney at the U.S. Securities and Exchange Commission. "You can't be putting out two sets of numbers."
"If true, the allegations are a matter of regulatory concern to FINRA and the SEC," Rick Ketchum, the watchdog's chairman and chief executive, said in an e-mailed statement.
One major institutional investor was informed of the lowered expectations during Facebook's IPO "roadshow," in which Morgan Stanley and other underwriters appeared before mutual funds and other big investors to make the case to buy shares in advance of the public offering.
"I am pretty sure the grandma who bought 10 shares of Facebook through her Schwab account didn't get that memo," said a person familiar with the matter who declined to be named to preserve his business relationship with Wall Street investment banks.
Facebook's offering was one of the most hyped events on Wall Street, and became the biggest tech IPO in history. The company raised $16 billion by listing on the Nasdaq Stock Market in a move that valued the company at $104 billion, which is bigger than American corporate stalwarts such asMcDonald's Corp. andAmazon.com Inc.
Facebook's stock lost $3.03 on Tuesday, or 9%, closing at $31, down sharply from its IPO price of $38.
Securities lawyers said the IPO's problems could invite lawsuits from angry investors and others against their brokers, Nasdaq, Morgan Stanley and potentially even Facebook.
"It's a disaster," Badway said. "I just can't believe they screwed up so badly."
Facebook declined to comment.
Nasdaq has set aside more than $13 million to deal with potential claims against the exchange, said Credit Agricole Securities analyst Rob Rutschow. He said there is fear that "Nasdaq has tarnished its reputation with potential companies looking to IPO, and that additional legal costs are possible."
The legal backlash has already begun. On Tuesday, Maryland investor Phillip Goldberg sued the stock exchange in federal court in New York, accusing it of failing to timely execute trades, causing him and others to lose money. The suit seeks class-action status.
Regulators also are putting the trades and the Wall Street players under scrutiny.
The Massachusetts Secretary of State, which regulates the securities industry in that state, issued subpoenas to Morgan Stanley regarding the bank's analyst discussions with "certain institutional investors about the revenue prospects for Facebook" before last week's IPO.
By Andrew Tangel and Stuart Pfeifer, Los Angeles Times