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Published: Thursday, 5/24/2012

Facebook IPO faces scrutiny, investor ire

Regulators examine lead bank's actions


NEW YORK -- Investors and regulators are raising new concerns about Facebook Inc.'s $16 billion initial public offering. The Associated Press reported that regulators are examining whether Morgan Stanley, the investment bank that shepherded Facebook through its highly publicized stock offering last week, selectively informed clients of an analyst's negative report about the company before the stock started trading.

Morgan Stanley analysts reduced their 2012 Facebook profit projection to 48 cents a share from 51 cents days before boosting the price range on the IPO, according to people familiar with the matter, who asked not to be identified because the process is private.

The analysts also cut their 2013 profit projection to 83 cents a share from 88 cents, the people said. Investors received the new figures by phone because underwriters weren't permitted to print anything about Facebook during the marketing period, the people said.

Rick Ketchum, head of the Financial Industry Regulatory Authority, the securities industry's self-policing body, said the question is "a matter of regulatory concern" for his organization and the Securities and Exchange Commission.

The regulators' report of possible investigation followed an announcement from William Galvin, the top securities regulator for Massachusetts, that his office has subpoenaed Morgan Stanley as it investigates whether Morgan Stanley divulged to only some clients that one of its analysts had cut his revenue estimates for Facebook before the stock hit the market on Friday.

The New York-based investment bank said its procedures complied with all regulations.

"Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs," Pen Pendleton, a spokesman, wrote in an e-mail.

Meanwhile, several shareholders who bought stock in the IPO have filed lawsuits against Facebook, its executives, and Morgan Stanley.

One suit, filed in U.S. District Court in New York, alleges that Facebook's IPO documents contained untrue statements and omitted important facts, such as a "severe reduction in revenue growth" that Facebook was experiencing at the time of the offering.

Morgan Stanley declined to comment on the lawsuits. Facebook said the lawsuit is without merit.

Another lawsuit, filed in San Mateo County Superior Court in California, alleges Facebook's IPO documents misled investors.

Both suits seek class action status on behalf of investors who bought Facebook stock on Friday and lost money.

A person familiar with the matter said yesterday that Facebook is talking with the New York Stock Exchange to move its stock from the Nasdaq Stock Market after a botched initial public offering on Friday.

The person spoke on the condition of anonymity because of lack of authorization to speak publicly. Facebook's IPO was delayed by a half-hour on Friday because of glitches on the Nasdaq.

The New York exchange declined to comment. A Nasdaq spokesman did not immediately return a call for comment.

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