The top securities regulator in Massachusetts has issued a subpoena to Morgan Stanley as part of an investigation into whether its analysts communicated revisions of Facebook’s revenue forecasts broadly to all clients ahead of last week’s initial public offering.
In spite of cutting forecasts for Facebook’s revenue growth after the social network group revised its prospectus, the underwriting banks, led by Morgan Stanley, soon afterwards increased the size of the offer by 25 per cent and priced the shares at $38, at the top of a new range of $34-$38.
Analysts at JPMorgan and Goldman Sachs also alerted clients of Facebook’s lower growth forecasts in the days before its IPO, people familiar with the process said.
The subpoena from the US state comes as Facebook shares lifted from their lows on Wednesday in New York.
The shares closed at $32 at market close, up 3.2 per cent on the day but still down about 15 per cent on the $38 offer price.
Scrutiny of the botched IPO intensified, including software problems on Nasdaq as well as the role of the underwriting banks.
Small investors have already begun to file lawsuits seeking class action status against Facebook, its underwriters and Nasdaq. Such opportunistic suits are common following large downward moves in the share price of public companies.
In a statement released late on Tuesday, Morgan Stanley said it followed the same procedures for the Facebook offering that it followed for all IPOs.
“After Facebook released a revised S-1 [IPO] filing on May 9 providing additional guidance with respect to business trends, a copy of the amendment was forwarded to all of MS’s institutional and retail investors and the amendment was widely publicised in the press at the time,” Morgan Stanley said.
It added: “In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information. These revised views were taken into account in the pricing of the IPO.“
Analysts cannot publish research about a company when their banks are providing underwriting services but they are allowed have verbal discussions with clients in the period leading up to an IPO.
The head of the Financial Industry Regulatory Authority, a private market regulator, also warned that selective communication could be “a matter of regulatory concern to Finra and the SEC”.
The US Securities and Exchange Commission is also reviewing Nasdaq OMX’s handling of the opening trade in Facebook’s initial public offering, after a software glitch delayed the market debut and caused confusion among traders.
SEC staff are trying to better understand what Nasdaq officials knew about the IPO auction software problems in the hours before trading began on Friday, and how it decided to move forward with the IPO, according to a person with knowledge of the review.
A spokesperson for the SEC would not confirm the Nasdaq inquiry.
Nasdaq also declined to comment. It has previously acknowledged that “poor design” delayed the IPO auction by 25 minutes, and has removed the relevant process from its software.