- Senior Nasdaq official reportedly tells customers it would have pulled out of Facebook IPO if they had known extent of problems
- In three days of trading, Facebook’s stock value has dropped a whopping 18 per cent
- Morgan Stanley subpoenaed by authorities in Massachusetts over the underwriter’s discussions with investors
- At least one investor sues Nasdaq, claiming the exchange bungled the IPO
PUBLISHED: 17:23 EST, 22 May 2012 | UPDATED: 20:09 EST, 22 May 2012
The floatation of Facebook is facing a federal probe amid allegations that underwriter Morgan Stanley kept some investors in the dark over forecasts that the stock would tank.
A subpoena has been served on the investment bank in Massachusetts and the federal Securities and Exchange Comission is reviewing the allegations.
It has been reported that Morgan Stanley, the lead underwriter on the deal, shared information with its major clients, institutional Wall Street investors, that suggested the stock would fall – while keeping small investors unaware.
Reuters reported that in the run-up to Facebook’s historic $16billion IPO on Friday, the bank unexpectedly delivered negative news to major clients: A reduction in revenue forecasts for the company.
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Two investors advised of the revised forecast said it might have contributed to the weak performance of Facebook shares, which sank on Monday and Tuesday – their second and third days of trading – to end more than 18 per cent below the IPO price.
It is unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly.
The company declined to comment when asked who was told about the research.
The change in Morgan Stanley’s estimates came on the heels of a May 9 Facebook filing of an amended prospectus with the SEC, in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices.
Mobile advertising to date has been less lucrative than advertising on desktops.
‘This was done during the road show – I’ve never seen that before in 10 years,’ said a source at a mutual fund firm who was among those called by Morgan Stanley.
The $38-per-share IPO price valued Facebook at $104billion.
The news comes as the Financial Industry Regulatory Authority’s chairman said that regulators plan to review allegations against Morgan Stanley.
‘The allegations, if true, are a matter of regulatory concern’ to FINRA and SEC,’ chairman Richard Ketchum told Reuters.
The news comes as a senior Nasdaq official told customers at the end of trading Tuesday that the exchange would’ve pulled the plug on Facebook’s IPO if it had known the extent of technical problems, according to the Wall Street Journal.
Facebook is additionally facing a federal probe into its disastrous floatation in the stock market after it emerged that underwriters may not have given investors critical information before the site’s initial public offering last week.
Massachusetts Secretary of Commonwealth William Galvin has issued a subpoena to Morgan Stanley over an analyst’s discussions with investors on Facebook.
A spokesman for Galvin’s office said: ‘The Securities Division has put out a subpoena to Morgan Stanley in connection with the analyst’s discussion with certain institutional investors about the revenue prospects for Facebook.’
In its three days of trading, Facebook’s stock has dropped 18 per cent from its $38 issue price.
For the thousands of investors that bought at the IPO, that’s bad enough, but one analysis of its earnings prospects suggests it could get a lot worse – more like $10 a share.
Despite it’s hype and its status as a cultural phenomenon, some estimates suggest Facebook would be fairly priced at $9.59.
Some analysts, however, see the stock returning to the $40 per share level it traded at last week.
‘Investors are looking for much more growth than the analysts covering the company,’ said Greg Harrison, corporate earnings research analyst at Thomson Reuters.
Two top U.S. financial regulators said the issues around the initial public offering of the social networking site should be reviewed, putting fresh pressure on the company, its embattled lead underwriter and the Nasdaq.
After Friday’s nearly flat close and Monday’s 11 per cent plunge, Facebook shares closed 8.9 per cent lower at $31 on volume of 101 million shares.
At that price the company has shed more than $19 billion in market capitalization from its $38-per-share offering price last week.
One person who failed to see the disaster coming was President Obama
During remarks at a Facebook-hosted town hall meeting with CEO Mark Zuckerberg last year, the president hyped the social networking site.
He said: ‘Nobody is doing better than Exxon. Nobody is doing better than Shell or these other companies. They are doing great. They are making money hand over fist. Well, maybe Facebook is doing a little better.’
Investors were still shaking their heads over the botched opening trading of Facebook when Reuters reported late Monday that the consumer Internet analyst at lead underwriter Morgan Stanley cut his revenue forecasts for Facebook in the days before the offering, information that may not have reached many investors before the stock was listed.
JPMorgan Chase and Goldman Sachs, which were also underwriters on the deal, each revised their estimates during Facebook’s IPO road show as well, according to sources familiar with the situation.
Reuters reported that Morgan Stanley selectively disclosed the change in Facebook estimates, which drew the attention of the main regulator of U.S. brokerages.
‘That’s a matter of regulatory concern to us and I’m sure to the SEC,’ said Richard Ketchum, the Financial Industry Regulatory Authority’s chairman and chief executive.
‘And without saying whether it’s us or the SEC, we will collectively be focusing on it.
At least one investor has sued the stock exchange on Tuesday, claiming that Nasdaq bungled the IPO and did not nix orders when asked to by would-be stockholders.
Bloomberg reported that Phillip Goldberg, an investor from Maryland, filed suit against Nasdaq after he claimed in his complaint that ‘investors seeking to purchase [Facebook] shares had no idea if their trades had executed, and, accordingly, had no idea if they owned Facebook shares at all.’
Despite that, Securities and Exchange Commission Chairman Mary Schapiro said investors should be confident in investing, but she conceded there were questions to answer as well.
‘I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook,’ she told reporters as she exited a Senate Banking Committee hearing.
With Facebook shares all but impossible to sell short, investors have sought out almost any related vehicle to bet against the social network. Over the past three trading days, prices plunged on two closed-end funds that owned pre-IPO shares.
Firsthand Technology Value Fund and GSV Capital Corp both dropped more than 25 percent even though their Facebook holdings make up only a small fraction of assets.
‘Until investors can actually short Facebook, they have to keep shorting other things that can give them some sort of proxy for Facebook,’ said Thomas Vandeventer, manager of the Tocqueville Opportunity Fund, which owns shares of both the battered closed-end funds.
Brokers who over-ordered shares in the expectation that supply would be limited continued to complain they received too much stock to handle and were left in the dark about forecast changes.
One Morgan Stanley Smith Barney adviser also cited the fact that institutional investors received information that retail investors did not, calling it ‘a huge issue for the entire industry.
‘Night and day the institutional clients get things that we don’t get. It’s a big issue,’ the adviser said, adding there was surprise within the brokerage that Morgan Stanley, as lead underwriter, had not done more to support the share price.
As bad as the declines have been, though, a view persists that the stock remains overvalued.
Thomson Reuters Starmine conservatively estimates a 10.8 percent annual growth rate – almost exactly the mean for the technology sector – which would value the stock at $9.59 a share, a 72 percent discount to its IPO price.
Similarly, the company’s price-to-earnings ratio remains lofty, even after the selloff.
The $31 price implies a forward P/E of 60, compared with Google’s 13.3 forward price-to-earnings ratio (for a similar rate of growth).
The one bright spot for Facebook was news late Tuesday that it had agreed to settle a proposed class-action lawsuit over its ‘Sponsored Stories’ feature.
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