Wednesday, May 23, 2012

Facebook, underwriters face lawsuit over IPO as hidden details emerge

Once information regarding analysts at Facebook underwriters making a "severe and pronounced reduction" regarding revenue forecasts for the company was made available, you had to bet this step was coming. Facebook and those underwriters, including Morgan Stanley, have been sued by investors in the social networking giant, who claim the defendants hid Facebook's weakened growth forecasts ahead of its IPO.

The lawsuit was filed in U.S. District Court in Manhattan on Wednesday. Tuesday, a similar lawsuit involving a different investor was filed in a California state court.

The New York filing said that research analysts at Facebook underwriters had lowered their business forecasts for Facebook during the "road show," but that these changes were "selectively disclosed by defendants to certain preferred investors" rather than to the public generally. The value of Facebook common stock has declined substantially and plaintiffs and the class have sustained damages as a result."

In addition, a new report indicates the reason that the underwriters made their change for Facebook's business forecasts.

"The analysts cut their estimates because a Facebook executive who knew the business was weak told them to."

It was, in a sense, a pre-earnings warning that Q2 2012 revenue and earnings would fall short of expectations. The problem is that, according to the report as well as the lawsuits, only those involved in the "road show," which is when the management of a company issuing securities or doing an IPO travels around the country giving presentations to potential investors, analysts, and fund managers, were made aware.

In other words, the 99 percent was unaware of this fact. It's made clear in this very detailed report on the matter that this was another example of Occupy Wall Street style collaboration between the investment banks and institutional and large investors.

Where things go from here remains to be seen. On Tuesday, both the SEC and FINRA indicated that a review of the IPO might be forthcoming.

In mid-morning PDT trading on Wednesday, Facebook's stock was up $0.70 to $31.70, but that was still down over $6 from the IPO price of $38 per share.

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