Did Facebook’s IPO underwriters hide bad news from the public ahead of time?

did facebooks ipo underwriters hide bad news from the public ahead of time facebookipoThe unexpected aftermath of the Facebook IPO continues. A day after shares in the company fell by 11 percent in their second day of trading – in the process, wiping $10 billion from the value of the company – news is emerging that banks in charge of the company’s initial stock offering may be facing official investigation over what is being called “selective release of negative news” about the company before stock went on sale.

Morgan Stanley, lead underwriter of the Facebook IPO, is at the center of allegations that one of its analysts, Scott Devitt, unexpectedly reduced revenue forecasts for the company in the days before the company went public. That alone is unusual – it is, apparently, not common for analysts for lead underwriters to make changes of that nature so close to an IPO – but there are additional concerns that news of Devitt’s forecast reduction was only selectively released to Morgan Stanley’s top clients instead of being more widely-shared. Additionally, some sources are claiming that analysts at fellow underwriters JP Morgan Chase and Goldman Sachs also reduced revenue forecasts ahead of the IPO, again sharing the revised information solely with institutional investors instead of making it public.

The accusations prompted an emailed statement from Rick Ketchum, chairman and CEO of the Financial Industry Regulatory Authority, that “the allegations, if true, are a matter of regulatory concern.” That’s a feeling shared by Securities and Exchange Commission chairman Mary Schapiro, who told reporters earlier today that, while she thinks “there is a lot of reason to have confidence in our markets and the integrity of how they operate,” she feels that “there are issues that we need to look at specifically with respect to Facebook.”

Morgan Stanley has already received a subpoena from security regulators in Massachusetts over the issue. Although the subpoena has not been made publicly available, state Secretary of the Commonwealth William Galvin has revealed that it was related to the revised financial projections and the sharing thereof. In response, a Morgan Stanley spokesman released a statement that the bank “followed the same procedures for the Facebook offering that it follows for all IPOs,” and that the revised forecast “was forwarded to all of Morgan Stanley’s institutional and retail investors” as well as being “widely publicized in the press at the time.”

Additionally, the statement says that, “in response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information. These revised views were taken into account in the pricing of the IPO.” Oddly enough, however, Morgan Stanley is declining to comment on whether it has actually received the subpoena.

Facebook stock fell a further 8.9 percent today in response to the news, bringing the total drop since stock went on sale last Friday to 18.4 percent.