Regulators ask if all Facebook investors were treated equally

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Regulators ask if all Facebook investors were treated equally
Highlights
  • Facebook said it would defend itself "vigorously" as it rejected the accusations in the first of half-dozen lawsuits.
Lawsuits piled up Wednesday against Facebook, its underwriters and the Nasdaq exchange as furious investors sought to recover losses after the company's $16 billion IPO debacle.

Facebook said it would defend itself "vigorously" as it rejected the accusations in the first of at least a half-dozen lawsuits being prepared against the social networking giant and its bankers.

The class-action suits alleged that Facebook, and Morgan Stanley, Goldman Sachs and other big Wall Street banks that distributed the shares withheld crucial information from smaller investors that they shared with big institutional clients.

They "failed to disclose that during the IPO roadshow, the lead underwriters... cut their earnings forecasts and that news of the estimate cut was passed on only to a handful of large investor clients, not to the public," said law firm Glancy Binkow & Goldberg in its suit.

In addition the Massachusetts state government issued a subpoena for the lead underwriter, Morgan Stanley, over how it shared information ahead of the massive share sale.

And one investor sued the Nasdaq OMX exchange for losses resulting from the huge computer glitches that stalled or prevented the execution of orders on millions of shares after the shares hit the market Friday.

After a lengthy buildup of expectations, Facebook went public Friday, selling 421 million shares to raise $16 billion in the country's second-largest IPO ever.

Investors had hoped to turn quick and easy profits on the shares, given how previous IPOs by tech giants like Google and LinkedIn rocketed upward.

But the shares plunged 18 percent over the first three trading sessions, hit by heavy institutional selling that was exacerbated by glitches in Nasdaq's system that fouled up orders for millions of shares.

The lawsuits alleged that, after Facebook revised its IPO filings with the Securities and Exchange Commission days before the issue, large institutional investors received privileged analyses from the underwriters that drove them to dump the shares, and small investors paid the price.

Facebook, in its first public statement since the IPO, vehemently rejected the charges in the first lawsuit to make it to the New York District Court, filed by lawyers for the Brian Roffe Profit Sharing Plan and two other investors.

"We believe the lawsuit is without merit and will defend ourselves vigorously," a Facebook spokesperson said.

The episode cast a dark cloud over what was supposed to be the brightest market opportunity for investors in years.

"The Facebook debacle is coming off as an insult to individual investors. It looks like the worst of Wall Street hype with a dose of chicanery to boot," said Dick Green at Briefing.com.

"Insiders certainly look like the winners and individual investors the losers."

"The FB IPO selective disclosure stories just keep getting worse. If true, an absolute outrage," said Sallie Krawcheck, former head of wealth management at Bank of America, on Twitter.

The company's share price rebounded slightly in trade Wednesday, climbing 3.2 percent to $32.00, but remained well below the $38 IPO price that investors paid.

In all more than $35 billion has been wiped off its market capitalization since the IPO valuation of $104 billion.

Meanwhile brokers were moving to sort out investor complaints of losses due to Nasdaq's inability Friday to process trading orders correctly.

Major retail brokers said they were trying to sort out what Fidelity called "an industry-wide issue that affected many different broker-dealers and other market participants."

"We understand that Nasdaq is working with federal regulators to determine what, if any, accommodation might be made," it said.

Regulators were also reported examining what happened with the underwriters, and the banking Committee of the US Senate was also informally gathering information on the case.

"If true, the allegations are a matter of regulatory concern to FINRA and the SEC," Rick Ketchum, the chief executive of the Financial Industry Regulatory Authority, said in a statement.

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