Investors in Facebook's IPO are not taking the stock's drubbing lying down and have launched lawsuits against the social network, its underwriters and NASDAQ, while regulators probe the way the debut was handled.
Investor Darryl Lazar has filed a class action suit against Facebook, Mark Zuckerberg, the network's early backers and the banks that helped it onto the market, including Morgan Stanley, Goldman Sachs and Merrill Lynch, among others, alleging that they failed to be upfront about the prospects for the business.
The suit stems from claims that Morgan Stanley and other banks that were underwriting the initial stock sale decided that their revenue estimates for Facebook were a bit generous and cut them, but only told their large investor clients, not the general public.
Lazar's complaint quotes news articles published after the shares in Facebook had started falling this week, particularly one by Reuters, that claimed that underwriting banks Morgan Stanley, JP Morgan and Goldman Sachs had all cut their earnings forecasts for the social network in the middle of the IPO roadshow.
Morgan Stanley told The Register in an emailed statement that it had followed the same procedure with Facebook's IPO as it does for all IPOs.
"These procedures are in compliance with all applicable regulations," it said.
But regulators are also casting a close eye over the Facebook proceedings.
Both the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission said it was an issue they had had thoughts about, but stopped short of saying there would be an investigation.
"It's a matter of regulatory concern to us and I'm sure to the SEC," said Richard Ketchum, FINRA's chief exec, according to Reuters. "And without saying whether it's us or the SEC, we will collectively be focusing on it."
SEC chair Mary Schapiro told reporters outside a Senate Banking Committee hearing that the commission would be asking questions.
"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 said.
And on top of all that, Massachusetts Secretary of Commonwealth William Glavin has issued a subpoena to Morgan Stanley.
"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," a spokesman for Galvin's office told Reuters.
A subpoena is a request for documents pertaining to the IPO, but it doesn't mean that an investigation will necessarily follow.
It has also been reported that NASDAQ OMX Group is facing a lawsuit for the technical glitches on the morning of Facebook's IPO, which led to buy and sell orders and their cancellations being held up.
Investor Phillip Goldberg has filed a class action citing NASDAQ's failure to "process Facebook trades promptly and efficiently, parties attempting to purchase Facebook shares were unable to determine if they had properly done so".
He said that at one stage on Friday, he placed an order to buy when stocks were at $41 or so, but by the time the trade was executed they had fallen to around $38 and the sale went through despite his attempts to cancel.
NASDAQ chief Robert Greifeld already admitted on Monday that the exchange mucked up and promised changes to its IPO systems to stop it happening again.
Whether the IPO was done shadily or not probably wouldn't matter quite so much to everyone if the Facebook shares hadn't been taking a beating in the market.
After a very brief high of $42 on opening, the stocks have plummeted, finishing yesterday at $31. The fall puts the shares 18 per cent below the IPO offer price of $38 and has wiped nearly $20bn off Facebook's market valuation.
Investors also seem to have a bit of selective memory when it comes to information from and about Facebook prior to its debut. The social network issued an updated prospectus to the SEC not long before its IPO that spoke of concerns about its customers moving to mobiles, where advertising was limited.
And in the week that it went public, General Motors, the US's third-largest advertiser, pulled all its adverts off the social network because it didn't seem to think they were working very well. ®