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Roadshow Issue May Invite SEC Probe Over Facebook IPO

 May 22, 2012 02:17 PM

(By Mani) The widely-anticipated IPO of Facebook, Inc. (NASDAQ:FB) is in the news since it went public and that too for all wrong reasons. Since, debuted on Nasdaq on May 18, Facebook shares have been marred by several issues right from technical glitches to lofty valuations.

Now, the latest one would definitely enrage investors as it relates to "selective dissemination." Reuters reported that the Morgan Stanley, the lead underwriter of Facebook IPO, cut its estimates of the social networking giant during the IPO roadshow.

Following Morgan Stanley, JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS) – other leading underwriters – have also cut their estimates on Facebook in the middle of the IPO roadshow.

[Related -Facebook Inc (FB) Q4 Earnings Preview: What To Watch?]

This is enough for investors to show their distaste over Facebook shares, which were lackluster since its opening day adding just 23 cents on its trading debut. On Tuesday, shares plunged as much as 31 percent to $23.41 Tuesday after falling 11 percent yesterday.

The estimate cuts followed a filing on May 9th from Facebook that said the company is yet to monetize its surging user base on tablets and smartphones and said its daily active users (DAUs) increasing more rapidly than the increase in number of ads delivered.

"We believe this trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions," the company said in a regulatory filing.

[Related -How bank reserves make the gap between deposits and loans disappear]

It is very unusual for underwriters to revise their estimates before a company's IPO. Even, if they do so, it should be made publicly available. However, in Facebook's case, it didn't happen and the sensitive information was made available to only few large institutional investors, keeping retail investors in the dark.

The worst part of it is smaller investors were kept at an unfair and competitive disadvantage versus their larger peers as revision of earnings and revenue forecasts is considered as  material information helping investors in their trading decisions.

As a result, the event could attract an investigation from the Securities and Exchange Commission (SEC) as this sort of selective dissemination is a violation of securities laws. The affected investors could seek an SEC probe over the issue and may ask for stringent regulations to prevent repetition of similar incidents.

Mary Schapiro, the chairman of SEC, told reporters that the issues surrounding Facebook's initial public offering should be reviewed. However, Schapiro's statement should not be construed as a precursor to a probe at least for the time being.

Nevertheless, the roadshow issue may definitely hurt Facebook's brand in the near-term and shake investors' confidence on the corporate practices of the company. The event may also create doubts in the minds of advertisers, who were still skeptical over their budgets on advertising in social networking sites as targeted are shifting to mobile devices versus traditional desktops.

California-based Facebook priced its eagerly-awaited IPO at $38, valuing it at $104 billion. In the past two days, about $15 billion have been wiped off, and the market cap is now standing at about $89 billion.

Mark Zuckerberg, who cofounded site in his Harvard dorm room, may be hoping that his marriage with Priscilla Chan may bring some lady luck to his favor and Facebook.

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