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Regulators probe Facebook IPO

May 23, 2012

US financial regulators are looking into whether lead underwriting bank Morgan Stanley selectively informed clients about negative prospects for Facebook. In the meantime, the IPO has turned out the worst since 2007.

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The US Securities and Exchange Commission (SEC) said Tuesday that it had subpoenaed the Morgan Stanley investment bank in connection with an investigation over whether it had informed only some of its clients about a report cutting revenue estimates for Facebook.

In addition, the Financial Industry Regulatory Authority - a self-policing body of the US finance industry - said that the issue was "a matter of regulatory concern" for it too.

Morgan Stanley was the lead underwriting bank guiding Facebook through its much anticipated first public listing Friday.

According to Reuters news agency, a Morgan Stanley analyst had cut his earnings estimate for Facebook ahead of the IPO, because he expected the social network's earnings to worsen as users increasingly accessed the site via a less advertising-friendly mobile phone app.

In a statement, Morgan Stanley didn't say which clients had been informed about the analysis, but added that "a significant number" of other financial groups had reduced their earnings estimates for Facebook too.

In addition, the investment bank claimed that revised estimates were taken into account in setting the stock offering price at $38 (29.9 euros) per share.

However, working with Morgan Stanley, Facebook first set a range of $28 to $35 for the offering price, then raised it to $34 to $38, before setting it at $38 the night before the IPO.

Moreover, people familiar with the IPO and cited by the Wall Street Journal said Morgan Stanley convinced Facebook to offer 25 percent more shares as there was "plenty of demand."

Worst IPO in five years

Facebook shares closed 8.9 percent lower on Tuesday at $31, meaning that investors buying the share at its IPO price of $38 have suffered an 18 percent loss.

According to figures released by US stock market analyst Dealogic, Facebook's IPO has been by far the worst of 24 first public listings carried out in the US since 2007.

On Friday, Morgan Stanley still tried to defend the $38 floor for Facebook shares by buying the stock itself.

In addition to charges of concealing information, the firm now also stands accused of having grossly overestimated demand for Facebook shares.

uhe/mll (AP, Reuters, dpa)