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Suits, regulators await Facebook on charges of select disclosures

NEW YORK — Facebook Inc and the underwriters of its initial public offering (IPO) face legal action and the scrutiny of regulators as investor anger mounts over its falling share price.

A class-action suit was filed Tuesday in a California court against the social-networking company, its officers and underwriters alleging the lead underwriters had cut their earnings forecasts for Facebook ahead of Friday’s IPO and disclosed the information only to a handful of large investors.

Releasing such information only to select, large investors is standard practice on Wall Street, news report said, but the slump in Facebook share prices — by 18 per cent in three trading days — has angered investors who have suffered losses and has shone an unfavourable spotlight on the way Wall Street does business.

Particular scrutiny has fallen on Morgan Stanley, the lead underwriter, first with accusations that too many shares (421.2 million) at too high of a price (38 dollars) were offered in the IPO and then on Tuesday with accusations that the latest earnings forecasts were not released to everyone.

At least two of Facebook’s underwriters, Morgan Stanley and Goldman Sachs Group Inc, reduced their financial projections for Facebook during the IPO’s “road show,” which is designed to increase investor interest in the stock, people close to the deal were quoted as saying by The Wall Street Journal.

“Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs,” a Morgan Stanley spokesman said in a statement Tuesday. “These procedures are in compliance with all applicable regulations.”

Regulators were also waving yellow cards. Wall Street’s self-regulator, the Financial Industry Regulatory Authority (Finra), said it was looking into allegations that underwriters had not been forthcoming with all potential investors.

“If true, the allegations are a matter of regulatory concern to Finra and the SEC,” Rick Ketchum, the authority’s chairman and chief executive, told the Journal.

The chairwoman of the Securities and Exchange Commission, Mary Schapiro, was quoted by The New York Times as saying the US government’s securities regulator would examine issues related to the IPO without being more specific.

William Galvin, secretary of the commonwealth in Massachusetts, who regulates security sales in the eastern state, said his office subpoenaed Morgan Stanley over its underwriting of the IPO and “discussions by their analysts with certain institutional investors about the revenue prospects for Facebook prior to that company’s initial public offering,” the Boston Herald reported.

Facebook’s stock slid 8.55 per cent Tuesday after tumbling 11 per cent Monday, bringing its price to 31.12 dollars per share.

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