Investigators are starting to inquire whether insiders on Wall Street may have had access to information that warned them to avoid investing in Facebook when the company went public. Morgan Stanley, which was a key player in encouraging the company’s IPO, may have told some of its clients that it was downsizing its own estimates of Facebook’s revenue stream. That less-than-sanguine picture was drawn after Facebook publicly stated their own lowered expectations of its advertising sales on mobile devices.
Ernest Badway, a former enforcement attorney at the U.S. Securities and Exchange Commission, said that this could be a case of “securities fraud — plain and simple … you can't be putting out two sets of numbers.” The SEC is getting ready to look into the case, as is the Financial Industry Regulatory Authority, and Massachusetts securities regulators have issued subpoenas for Morgan Stanley.
Reportedly, one major institutional investor heard of the revised financial expectations of Facebook during Facebook’s IPO “roadshow,” where Morgan Stanley and other underwriters appealed to investors to buy shares in the company before the IPO.
Facebook's IPO was the largest tech IPO in history. It raised $16 billion by listing on the Nasdaq Stock Market while claiming the company was worth $104 billion, more than McDonald's Corp. and Amazon.com Inc. But since last Friday, shares are down 26%.
Securities lawyers said the IPO's problems could invite lawsuits from angry investors and others against their brokers, Nasdaq, Morgan Stanley and potentially even Facebook.
Now Nasdaq, fearful of ruining its reputation, has put $13 million aside to deal with potential claims against it. They have reason to worry; Maryland investor Phillip Goldberg sued the stock exchange in federal court in New York, accusing it of failing to execute trades in a timely manner, and the suit seeks class-action status.