Regulators are examining whether Morgan Stanley, the investment bank that shepherded Facebook through its highly publicized stock offering last week, selectively informed clients of an analyst’s negative report about the company before the stock started trading.
Rick Ketchum, the head of the Financial Industry Regulatory Authority, the self-policing body for the securities industry, said on Tuesday that the question is “a matter of regulatory concern” for his organization and the Securities and Exchange Commission.
The top securities regulator for Massachusetts, William Galvin, said he had subpoenaed Morgan Stanley. Galvin said his office is investigating whether Morgan Stanley divulged to only some clients that one of its analysts had cut his revenue estimates for Facebook before the stock hit the market on Friday.
The bank said late on Tuesday that it “followed the same procedures for the Facebook offering that it follows for all IPOs,” referring to initial public offerings of stock. It said that its procedures complied with regulations.
The questions about the role played by Morgan Stanley, the lead underwriter for the deal, add to the confusion surrounding Facebook’s IPO. In the most hotly anticipated stock debut in years, the offering raised US$16 billion for the social networking company, valuing it at US$104 billion
On Tuesday, Robert Greifeld, the CEO of the NASDAQ Stock Market, acknowledged to shareholders of NASDAQ’s parent company that “clearly we had mistakes within the Facebook listing.”
The stock debut, originally set for 11am on Friday, was delayed more than half an hour because of technical problems at NASDAQ. Some brokerages were still sorting out the aftermath on Tuesday.
In the meantime, Facebook stock itself has been a disappointment. It fell US$3.03 on Tuesday to close at US$31 and has now fallen US$7, or more than 18 percent, from its offering price of US$38.
Reuters news service reported on Tuesday that a Morgan Stanley analyst, Scott Devitt, cut his estimate for Facebook’s revenue this year to US$4.85 billion from more than US$5 billion earlier. Reuters reported that it was unclear whether Morgan Stanley had told only select clients about the reduced estimate.
Morgan Stanley, in its statement, did not specifically address which clients might have been told about a reduced estimate from one of its analysts. It said that “a significant number” of analysts, including those from other firms underwriting the stock issue, had reduced their estimates for Facebook to reflect publicly available information about the company.
That was a reference to a May 9 regulatory filing in which Facebook said a shift by many Facebook users toward mobile devices might limit its revenue growth. Social media companies have struggled to make as much money as they would like from mobile advertising. Advertising accounts for more than 80 percent of Facebook’s overall revenue.
Morgan Stanley also said that revised analyst views were taken into account in setting the stock offering price at US$38 per share. Facebook, working with Morgan Stanley, first set a range of US$28 to US$35 for the offering price, then raised the range to US$34 to US$38 before setting it at US$38 on the night before the IPO.
The Wall Street Journal reported on Tuesday night that Facebook’s chief financial officer, David Ebersman, decided shortly before the stock debut to raise the number of shares the company would offer by 25 percent. The Journal, citing people familiar with the planning of the stock offering, also reported that Morgan Stanley had assured Ebersman there was plenty of demand for the stock.