Facebook, Morgan Stanley Face Lawsuit, Investigation Over Alleged Selective Sharing Of Lower Revenue Projections

By Julie D. Andrews 

Were certain big-name investors made privy to information that should have been disseminated more widely? Such are the latest allegations with regard to last Friday’s Facebook initial public offering, which have led to a lawsuit filed against the social network and banks including Morgan Stanley today, following the call for an investigation yesterday by the Financial Industry Regulatory Authority and the Securities and Exchange Commission.

Reuters reported that a lawsuit was filed in U.S. District Court in Manhattan Wednesday, accusing Facebook, Co-Founder and Chief Executive Officer Mark Zuckerberg, and banks including Morgan Stanley of concealing “a severe and pronounced reduction” in revenue growth forecast from investors, alleging that the forecast revisions were “selectively disclosed by defendants to certain preferred investors,” rather than to the general public.

The complaint went on to say:

The value of Facebook common stock has declined substantially, and plaintiffs and the class have sustained damages as a result.

Facebook shares were trading at just over $32 at the time of this post, down nearly $6 from the IPO price of $38 per share.

Negative reports with regard to the Facebook IPO have been gathering traction and heat since Zuckerberg rang the Nasdaq opening bell Friday morning. It started with the trading delay of 30 minutes, causing some clients to not know at Friday’s end whether their trade orders had gone through.

Then Tuesday, a subpoena was issued to Morgan Stanley, lead underwriter of the Facebook IPO, by Massachusetts Secretary of Commonwealth William Galvin, regarding communication during the Facebook roadshow between an analyst and investors about reduced revenue projections, Reuters reported.

The regulators are investigating whether only certain major investors were made privy to the updated assessment prior to Facebook’s $16 billion IPO, CNN Money reported.

In response, Reuters reported, a Morgan Stanley spokesperson emailed:

Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations.

The revisions were made in response to Facebook’s amended S-1 SEC filing May 9, in which it became clear that continuing to grow revenue could potentially be difficult for Facebook due to the rush to mobile by users of the social network.

FINRA and the SEC called for a review of the Facebook IPO Tuesday, and FINRA Chairman and Chief Executive Officer Rick Ketchum said in a statement:

If true, the allegations are a matter of regulatory concern to FINRA and the SEC.

Some say the alleged selective sharing could have been to blame for the stock’s staggering performance, Reuters reported.

Business Insider listed the adjusted figures by the four banks, “according to one of the investors who received the new numbers.”

Readers: How do you think all of this will end for Facebook and the other parties involved?

Image courtesy of Shutterstock.