Facebook’s Fumbled IPO Under Scrutiny

Posted on May 22, 2012

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The fallout over Facebook’s botched IPO continued on Tuesday with a lawsuit filed against NASDAQ over mishandled orders and word that regulators may investigate Morgan Stanley, which helped set the price of the stock, and other underwriting banks.

Shares of Facebook have stumbled on the stock market since the social media company first began publicly trading on Friday. Facebook stock fell again on Tuesday, tumbling to $31 a share, or 18% below its IPO price of $38. —TEB

The New York Times:

... Regulators are concerned that banks may have shared information only with certain clients, rather than broadly with investors. On Tuesday, William Galvin, the secretary of state in Massachusetts, subpoenaed Morgan Stanley over discussions with investors about Facebook’s offering. The Financial Industry Regulatory Authority, Wall Street’s self-regulator, is also looking into the matter. The chairwoman of the Securities and Exchange Commission, Mary Schapiro, said Tuesday that the agency would examine issues related to Facebook’s I.P.O., but she did not elaborate.

The steps a company takes to go public are highly choreographed and regulated by securities law. A company cannot comment or disclose new information about its business or prospects unless it does so publicly by amending its prospectus. Otherwise, it risks running afoul of regulators. The company could also be vulnerable to securities lawsuits, as investors would have to prove only that it made “material misstatements” ahead of an offering, rather than a high threshold of securities fraud.

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Reuters:

Besides the pressure on Facebook and on Morgan Stanley, there is also an intense focus on Nasdaq, which has shouldered much of the blame for the trading failures.

The exchange has set aside money to compensate customers, but some on Wall Street are warning its ability to snag future big IPOs is at risk. Meanwhile, a suit filed late Tuesday in Manhattan federal court seeks class-action status for anyone who lost money due to a mishandled order.

“It’s dreadful for the markets,” former SEC Chairman Arthur Levitt said of the IPO and its handling by banks and Nasdaq. “It’s an event with long-lasting negative implications for an industry that can ill afford this kind of blemish, and the last chapter hasn’t been written. Nobody looks good here.”

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