Facebook Inc., the world’s largest social-networking company, could be exposed to legal challenges surrounding its initial public offering similar to those faced by Morgan Stanley, according to legal experts.
In the first regulatory claims to flow from the May 17 IPO, Massachusetts officials said on Dec. 17 that they fined Morgan Stanley $5 million for letting its investment bankers provide research analysts specific revenue information that was not disclosed by Facebook to the general public. That broke a decade-old rule enacted after the dot-com crash to block bankers from influencing analysts, Massachusetts said.
The settlement includes for the first time details of the closed-door conversations between Morgan Stanley and Facebook ahead of the IPO, including testimony from Michael Grimes, who led the deal for the bank. According to the consent order, Grimes wrote a script for Facebook’s then-treasurer to read to analysts that detailed Facebook’s lowered revenue estimates.
Grimes “did everything but make the phone calls himself,” the regulator said in a statement. Grimes was identified in the settlement only as a “senior investment banker,” though it provided biographical details that match his.
The revelation that Facebook gave specific estimates to bank analysts and not to the public revives questions about whether the company was sufficiently forthcoming ahead of the IPO, said Stephen Diamond, an associate professor at Santa Clara University School of Law.
“By providing that information to just a subset of potential investors, in essence they have denied other investors access to material information,” Diamond said. The Securities and Exchange Commission “should have pushed much harder to find out whether there was quantifiable data available or not,” he added.
Facebook has not been accused by regulators of wrongdoing. Michael Buckley, a spokesman for the Menlo Park, California- based company, declined to comment, as did John Nester, a spokesman for the SEC. New York-based Morgan Stanley did not admit or deny the Massachusetts claims in settling.
The settlement offers fresh insight into a widely anticipated IPO that turned into a debacle for the company and Morgan Stanley. Facebook shares have tumbled 27 percent since they started trading for $38 on May 18, to $27.71 as of the close yesterday. The company capitalized on its popularity among consumers by raising the price and number of shares sold to retail investors, who weren’t privy to the private conversations or revenue estimates.