Morgan Stanley might have improperly disclosed information to the investors
Facebook’s shares continued their downward spiral for the third day yesterday, closing at $31 or 18 percent down over the original asking price. If that wasn’t enough, two US financial regulators have expressed their concern over the handling of the IPO, and could begin an official investigation.
The stock launch was plagued by technical problems, and many investors claim the shares themselves were overvalued. Lead underwriter of the IPO Morgan Stanley came under fire for selective disclosure of important information that might have given an advantage to institutional investors.
Don’t believe the hype
Facebook initially said the appropriate range for its shares was $28 to $35. However, last week it suddenly raised the price, expecting shares to sell between $34 and $38. The company’s founders and venture capital funders then increased the number of shares they were selling, so the number of shares available went up by 25 percent.
Since trading started, the company has already lost more than $19 billion in market capitalisation from its $38-per-share offering price.
The NASDAQ stock exchange has been blamed for a technical glitch that delayed Facebook’s market debut by roughly half an hour, and later delayed order confirmations.
The confidence of investors was undermined by reduced earnings projections, and the impact of Facebook users shifting to mobile platforms, where advertising revenue is lower than on PCs. Even on the traditional platforms, Facebook’s web advertising still has to prove its worth.
Reuters reported on 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 was not disclosed to the market before the stock was listed.
“Facebook changed the numbers. They didn’t forecast their business right and they changed their numbers and told analysts,” said a source at one of the underwriters with knowledge of the situation.
Informing big institutional investors, but not the market left both Facebook and Morgan Stanley open to accusations of selective disclosure. And the US regulators couldn’t ignore such accusations. Both the Financial Industry Regulatory Authority (FIRA) and Securities and Exchange Commission (SEC) have said they will investigate Facebook’s IPO.
In addition, several class action lawsuits were filed against the company and the stock exchange by the investors.
“It’s dreadful for the markets,” former SEC Chairman Arthur Levitt said of the IPO. “It’s an event with long-lasting negative implications for an industry that can ill afford this kind of blemish, and the last chapter hasn’t been written. Nobody looks good here.”
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