As Washington intensifies its scrutiny of the initial public offering of Facebook, the company’s bankers are facing questions about whether the process — even if perfectly legal — was fair.
The concerns center on Morgan Stanley, Goldman Sachs and other banks involved in the I.P.O. that shared a negative outlook about Facebook with a select group of clients, rather than broadly with all investors.
In the days leading up to Facebook’s debut, analysts at several banks ratcheted down their growth estimates for the social network. The move came after the company told them that quarterly and annual revenue would be on the softer side, said people briefed on the matter who spoke on the condition of anonymity because they were not authorized to discuss the issue publicly.
As is typical in the I.P.O. process, research analysts at Morgan Stanley, Goldman Sachs and other firms contacted certain clients to discuss their revised expectations, while other big investors called on the banks to get their new take. But ordinary mom-and-pop investors did not have the same access to the valuable information.
Now, regulators and lawmakers are taking a closer look.
This week, the Securities and Exchange Commission’s enforcement division opened a preliminary inquiry into the Facebook offering, a person briefed on the matter said. The Senate Banking Committee and the House Financial Services Committee have also started informal examinations into the I.P.O. process.
Congressional aides plan to talk with Facebook executives, regulators and others involved in the I.P.O. in the coming days, after which the Senate committee will weigh whether to hold a public hearing about the matter.
“While the S.E.C. investigates some of the problems surrounding the Facebook I.P.O., I think it is important to broadly and publicly examine the procedures for taking a company public,” said Senator Jack Reed, Democrat of Rhode Island and chairman of the Senate Banking Subcommittee on Securities, Insurance, and Investment. “We need to ensure the system is fair, balanced, and works for everyone.”
The scope of the S.E.C. inquiry is unclear, though the agency’s market abuse unit could examine how nonpublic information was disseminated to certain investors — and whether it conflicted with the company’s public disclosures and regulatory filings. One person close to the matter added that the agency has also heard complaints from investors who did not know how many shares they held, amid technical missteps at the Nasdaq exchange on Friday.
No one at Facebook or any of its underwriters have been accused of any wrongdoing, and people close to the matter cautioned that the company and its banks might not have run afoul of any regulations. The S.E.C., Facebook and Morgan Stanley all declined to comment.
The most highly anticipated technology offering in years, Facebook’s debut has instead disappointed many once-enthusiastic investors. While underwriters, investors and analysts had hoped for even a small “pop” on the first day, Facebook barely broke its offering price of $38 a share and required support from Morgan Stanley to remain above that.
Facebook tumbled in its next two days of trading before finally closing up 3.2 percent on Wednesday. Still, at $32, the company’s shares remain well below their offer price.
Many market participants continue to cope with the fallout of Facebook’s messy debut. Morgan Stanley’s brokerage arm wrote in an internal memorandum on Wednesday that it was reviewing clients’ orders and might reimburse customers for pricing discrepancies.
As the largest Internet I.P.O. on record, Facebook’s offering has drawn intense scrutiny from the start. But with the stock shedding $16 billion in market value, some small-time investors are crying foul and regulators are wondering what went wrong.
“What brighter light exists than the highest profile I.P.O. in memory,” Jacob S. Frenkel, a former S.E.C. lawyer and now a partner at Shulman, Rogers, Gandal, Pordy Ecker. “With Memorial Day weekend, the summer pools are open, and this is an invitation for all the regulators to jump right in.”
One avenue for regulators could be Facebook’s conversations with analysts, particularly whether the social network made statements that contradicted its public filings. Under securities rules, a soon-to-be public company is permitted to provide “material” information to research analysts. But if that data is inconsistent with the company’s public prospectus, the issuer must revise the regulatory filing.
Such scrutiny is likely to focus on at least two recent conference calls Facebook held with its analysts. During a discussion in April, Facebook briefed about 20 bank analysts on its revenue guidance for the second quarter and the full year, according to a person briefed on the matter. On May 9, the day the company submitted a revised public prospectus disclosing its challenges in mobile advertising, Facebook spoke to the analysts again, telling them that revenue would come in at the lower end of its forecast.
One bank then cut its revenue expectations by 5 percent for the second quarter. Goldman analysts sent an internal memo, with the revised figures, to the firm’s private wealth managers and institutional sales force.
While the forecasts did not appear in the company’s filings, they do not seem to contradict any information the company previously disclosed, according to securities lawyers and professors following the details of the Facebook I.P.O. In its prospectus, Facebook highlighted broad risks facing its future growth.
Another potential line of inquiry for regulators, securities experts say, is whether bank analysts disseminated information unfairly to only choice investors. Before a company goes public, analysts at banks that underwrite the offering are not allowed to publish forecasts or other research about the company. They can provide those estimates only orally, for example in a telephone conversation, and they generally do so only with their biggest clients.
Securities lawyers note that research analysts are not obligated to share their work with the wider public. The rules governing the I.P.O. process allow analysts to confer with particular clients, as long as it is done in line with a bank’s longstanding policies.
Still, Facebook’s I.P.O. has left a sour taste with some investors, who believe the system is structured to favor the biggest investors. The process — which prominently features a series of closed-door meetings with management teams known as a roadshow — gives big investors like hedge funds a privileged window into the company.
“You have this legacy problem,” said Christopher J. Keller, a partner at Labaton Sucharow. “Twenty to thirty years ago, there was no such thing as a retail investors as we know it, so we still have rules that allow the large player in the market to have a leg up.”
It’s a lesson Elias Fiani recently learned.
During Facebook’s first hour of trading on May 18, Mr. Fiani, a 53-year-old employee of the New York City Transit Authority, bought 1,000 shares through Bank of America Merrill Lynch for $38 a share. On Monday morning, he panicked as the stock dove, and unloaded his stake at $33, taking a $5,000 loss.
Two days later, his brokerage firm called, asking him for an additional $4,000. Because of an error, the correct purchase price should have been $42.
Adding insult, he found out that some investors had received information about Facebook’s financials that he never got. He called the S.E.C. on Wednesday afternoon to air his complaints.
“It’s about distrust,” Mr. Fiani said. “This is another stock market rigging.”
Article source: http://dealbook.nytimes.com/2012/05/23/regulators-ask-if-all-facebook-investors-were-treated-equally/?partner=rss&emc=rss
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