Facebook Inc took yet another hit on the stock market Tuesday, losing billions of dollars in market value amid calls for investigations by two top U.S. financial regulators into last Friday’s botched Nasdaq debut and reports that an analyst with the company’s lead underwriter warned some clients of scaled-back financial estimates ahead of the public offering.
Shares have nosedived by more than 18 per cent since the company’s public debut at $42.05 (U.S.) per share last Friday. Shares closed Tuesday at $31.12. The company has lost more than $19 billion in market value.
The social networking giant’s rocky public debut last Friday, marred by technical problems that caused widespread trade delays and sparked anger and confusion among investors, has been widely labelled a botched job on the part of the Nasdaq, Facebook and its underwriters led by Morgan Stanley.
On Tuesday, Securities and Exchange Commission chairman Mary Schapiro and Rick Ketchum, the Financial Industry Regulatory Authority’s chair and chief executive, called for separate reviews of the circumstances surrounding Facebook’s bungled initial public offering last week, placing mounting pressure on the parties involved as the $16-billion IPO deal continues to sour on the market.
The announcement followed a report from Reuters Monday night that a Morgan Stanley analyst warned some investors that he had cut revenue forecasts for Facebook in the final days before the offering, a time when those same banks were drumming up investor support for the social network’s stock in the run-up to the IPO.
“That's a matter of regulatory concern to us and I'm sure to the SEC,” Ketchum said. “And without saying whether it's us or the SEC, we will collectively be focusing on it.”
A pair of investors who said they were alerted to the Morgan Stanley analyst’s forecast change told Reuters the revision came as a “big shock” to some and may have contributed to Facebook’s weak performance on the Nasdaq. One source at a mutual fund firm reportedly told Reuters they were called by Morgan Stanley during the company’s road show and told of the revised forecast.
Reuters also reported that two other Facebook underwriters, JPMorgan Chase and Goldman Sachs, also revised their forecasts after Facebook amended its SEC filing in early May to include caution over its revenue growth due to advertising challenges in the mobile industry.
U.S. investment bank analysts cannot legally release reports or contact investors with changed forecast information while working on IPO files, according to Max Wolff, a senior equity analyst at Greencrest Capital Management. They can, however, divulge information if individual investors contact them independently.
It remains unclear whether the analyst in question initiated contact with investors. But Massachusetts Secretary of Commonwealth William Galvin issued a subpoena to Morgan Stanley on Tuesday in connection with the reports of pre-IPO analyst-investor discussions.
A Morgan Stanley spokeswoman reached Tuesday refused to comment on the allegations.
Even if Morgan Stanley abided by regulations, Wolff said news that analysts shared their revised forecasts with only a select number of clients shortly before the feverishly-anticipated IPO is “far from best practice.”
“It takes this to another level of dysfunction,” said Wolff. “There were high hopes that Facebook would restore public confidence in Wall Street. But this deal is beginning to display a significant number of things that have made people unhappy with Wall Street. It creates the notion that the little guy gets screwed and doesn’t get the information the big guy gets.”
Longtime IPO watcher Francis Gaskins said people who bought Facebook shares without knowing about the downgraded revenue forecast from the company's own underwriters should be “outraged.” Gaskins, president of IPODesktop, said ordinary investors already assume the IPO process favours big institutional investors and investment banks — and this won't do anything to help.
“It's going to be tough to overcome that perception. I really hope it doesn't scare retail investors away from the IPO market, but it might,” said Gaskins, adding that selectively disclosing such critical information is “ethically challenged” and should be probed by regulators and lawmakers.
Meanwhile, several Facebook investors are reportedly still waiting for their trades from last Friday to be resolved. One investor sued Nasdaq in Manhattan federal court on Tuesday after being allegedly hit by Friday’s technical glitch. The investor, Maryland resident Philip Goldberg, is seeking class-action status on behalf of all those who lost money as a result of the delays.
Nasdaq chief executive Robert Greifeld issued an apology Sunday for the technical problems that affected Facebook’s opening day, and his company announced modifications Monday to its IPO procedures to prevent the glitch from recurring. J. Rubin
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