Morgan Stanley Under Scutiny for Facebook IPO Forecast

Facebook Logo Mark Zuckerberg Inset - H 2012

Facebook Logo Mark Zuckerberg Inset - H 2012

At issue: whether investors received banks' new estimates ahead of the social network's much-hyped initial public offering.

After Facebook's stock tumbled following a highly anticipated IPO, regulators are looking at the part Morgan Stanley and other banks played in forecasting the outcome -- and how much they told investors.

According to Reuters, a web analyst at Morgan Stanley -- the main underwriter -- informed clients ahead of Friday's initial public offering that he had cut his revenue estimates, a forecast that some investors might not have received. Two other underwriters, JPMorgan Chase and Goldman Sachs, also changed their projections during Facebook's IPO road show, Reuters said.

Meanwhile, government regulators are cracking down: on Tuesday, the Massachusetts Secretary of the Commonwealth issued a subpoena to Morgan Stanley over the analyst's communications; the Financial Industry Regulatory Authority said it intends to probe the situation along with the U.S. Securities and Exchange Commission.

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For its part, Morgan Stanley defends its actions as "in compliance with all applicable regulations."

The main issues in question concerning an investigation: whether analysts violated disclosure policy, considering the inside information at their fingertips; whether they played favorites with certain investors as far as relaying reduced forecasts; whether the timing of the said reduced forecasts breached federal securities laws.

Earlier this week, Facebook's stock slipped 11 percent, leading to speculation that underwriters overestimated demand ahead of the company's IPO; in the lead-up, Morgan Stanley increased the offering price range and early investors the number of shares they were selling in the offering, a sign of healthy demand -- raising $16 billion for Facebook, which was valued at $104 billion.

By Tuesday, stock had fallen 18 percent to $7 from its initial price of $38.

Nasdag Stock Market CEO Robert Greifeld told shareholders of Nasdaq's parent company, "clearly we had mistakes within the Facebook listing."