Investors sue Facebook

Investors sue Facebook, advisers as scrutiny of IPO hype intensifies

By Peter Whoriskey and David S. Hilzenrath, Published: May 24

It was just the kind of information that could make you a million. But you couldnt find it on Facebook or, for that matter, anywhere else on the Internet.

In mid-May, as the social-networking company prepared for a public sale of its stock, an analyst at Morgan Stanley began advising clients orally that Facebook profits would probably be lower than previously estimated.

Facebooks phenomenal rise:In seven years, the social networking site has grown from a project hatched in a college dorm to the largest social networking site in the world, well on its way to hitting its goal of having 1 billion users.

Facebook joins ranks of largest IPOs in U.S. history:Facebook made its market debut May 18 after having raised $16 billion. Heres a look at where it falls among the top 10 IPOs in U.S. history. Data comes from Renaissance Capital.

The fact that the analyst worked for Morgan Stanley, which was the lead bank arranging for the sale of the companys stock, added credibility to his analysis. At just about the same time, other analysts working for banks affiliated with the sale similarly reduced their earnings estimates.

The investors who received and took note of these warnings may have saved lots of money: As many investors now know all too well, the value of Facebook stock rose briefly on its first day and has since plunged 16 percent from its original price.

Now federal regulators, shareholder attorneys and angry investors are looking askance at the hype and company disclosures that attended the lead-up to last weeks ballyhooed Facebook stock sale.

They want to know whether the company and the banks that arranged the sale pulled one over on ordinary investors, against whom the odds are often stacked in initial public offerings.

The true facts at the time of the [sale] were that Facebook was then experiencing a severe and pronounced reduction in revenue growth, according to a lawsuit filed Wednesday against the company, its directors, Morgan Stanley and other banks affiliated with the sale.

(Washington Post Co. Chairman Donald E. Graham is on the board of Facebook and is named in the lawsuit.)

A raft of complex regulations attempt to ensure that the information public companies give out to investors is not only true but is distributed in a way that does not favor big institutional investors over so-called retail investors.

The Securities and Exchange Commission has confirmed that it is looking at the Facebook IPO, although it has not publicly described its focus.

Massachusetts regulator William Francis Galvin said his office has subpoenaed Morgan Stanley in connection with discussions by their analyst with certain institutional investors about the revenue prospects for Facebook before the IPO.

The Financial Industry Regulatory Authority, an industry watchdog, also has jurisdiction. The organizations chairman and chief executive, Richard G. Ketchum, told Reuters it would be a matter of regulatory concern if Morgan Stanley shared negative news with institutional investors before the IPO.

But FINRA spokeswoman Michelle Ong said by e-mail that the matter has been blown out of proportion and that Ketchum was not even saying that we are planning to look at it.

Until we unwind the facts and circumstances surrounding this situation, it is inappropriate to speculate about what potential violations may have occurred, Ong said.

Companies such as Facebook are prohibited from selectively disclosing important information to favored analysts or investors.

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I like how Zuckerberg dumped 30 million shares at $38 per share

[size=150]Profit = USD 1.14 billion[/size] in one day :smiley:

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