guardian.co.uk,
Tom McCarthy in New York, Tuesday 22 May 2012
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| Facebook stock charted a lackluster performance in its first day of trading before falling steeply at the start of this week. Photograph: Brendan Mcdermid/Reuters |
Financial
regulators are to investigate whether the banks in charge of Facebook's initial
stock offering broke the rules by selectively releasing negative news about the
company before shares went on sale.
The
financial industry regulatory authority (Finra) is looking into allegations
that Morgan Stanley and other banks released reduced revenue forecasts for
Facebook to big investors – but not the general public – before Friday's IPO.
Such activity could constitute a violation of securities law.
Mary
Schapiro, chairwoman of the securities and exchange commission, said it also
had concerns. Speaking to reporters outside a Senate banking committee hearing
into JP Morgan's financial reporting, she said: "I think there is a lot of
reason to have confidence in our markets and in the integrity of how they
operate, but there are issues that we need to look at specifically with respect
to Facebook."
Facebook
stock charted a lackluster performance in its first day of trading before
falling steeply at the start of this week. News of the Finra investigation
drove the stock down more than 8% Tuesday.
It is the
second regulatory investigation tied to the Facebook IPO. The SEC announced
Friday that it was looking into reports of breakdowns in trading mechanisms at
the Nasdaq exchange as the stock went on sale.
And the SEC
investigation isn't the only headache for Nasdaq after the Facebook IPO. An
investor is suing the exchange, accusing it of negligence in handling trades
that resulted in losses for traders, Reuters reports.
All three
banks that worked on the Facebook deal – Morgan Stanley, JP Morgan and Goldman Sachs – will be investigated for allegedly sharing the negative news with
institutional investors but not the public at large, Finra chairman Richard
Ketchum told Reuters.
"If
true, the allegations are a matter of regulatory concern to Finra and the
SEC," Ketchum said.
The
Facebook underwriters already had come under criticism for rolling out the
stock at a price the market could not sustain, although the aggressive pricing
netted $16bn for Facebook owners.
Barry
Ritholtz, the widely followed financial blogger and chief market strategist at
Fusion IQ in New York, criticised all sides – Facebook, Morgan Stanley and
Nasdaq.
"Thus,
what we see are a series of bad decisions made by Facebook's executives going
back many years," he wrote on his blog Tuesday. "The insiders got
greedy, too clever by half, in how they used secondary markets. They picked a
bad banker and an awful exchange," Ritholtz said.
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