Facebook IPO debacle triggers legal debate over disclosure

Analyst Cuts

Morgan Stanley analysts cut their 2012 profit estimate for Facebook to 48 cents a share from 51 cents, said two of the people, who asked not to be identified because the process was private. They also cut their 2013 profit projection to 83 cents a share from 88 cents, they said. Investors received the new figures by phone as underwriters weren’t permitted to publish anything about Facebook during the marketing period, according to the people.

While the communication of the estimates may have been selective disclosure, investors may only have a case if they can prove the filing omitted crucial information, John Coffee, a Columbia University law professor, said in an e-mail.

“This is a good example of the shortfall of Regulation FD, which should embarrass the SEC,” he said.

While analysts cut their estimates, Facebook and its underwriters raised both the price range and the number of shares on offer. Facebook sold shares at $38 apiece in its IPO. The stock hovered close to that price in its trading debut as Morgan Stanley bought the stock to stabilize it, people familiar with the matter said at the time. The stock later fell as low as $30.94 on May 22.

Running for Exits

“If it turns out that the vast majority of investors who ran for the exits right off the bat, ran for the exits because they knew something, that’s clearly material,” said Dominic Auld, a lawyer at Labaton Sucharow, a New York-based law firm specializing in securities litigation on behalf of shareholders. He said he’s currently not representing anyone with a suit in connection with the IPO.

Morgan Stanley’s procedures in the offering are in compliance with all regulations, Pen Pendleton, a spokesman for the New York-based firm, said in a statement this week. The bank said it sent the revised prospectus to all institutional and retail clients and that the revised analyst estimates were taken into account in the initial share sale’s pricing. He declined to comment beyond the statement.

Investors have lost more than $2.5 billion since the offering last week, according to a complaint filed yesterday in Manhattan federal court. Among those named as defendants in the suit are Facebook, CEO Mark Zuckerberg, Chief Financial Officer David Ebersman, Morgan Stanley and other underwriters.

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