Morgan Stanley defended its role in Facebook Inc.’s initial public offering after a Massachusetts regulator subpoenaed the bank over talks between an analyst and investors about the social media company’s revenue outlook.
“Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs,” Pen Pendleton, a spokesman for the New York-based investment bank, said yesterday in an e-mailed statement. “These procedures are in compliance with all applicable regulations.”
Facebook shares have plunged 18 percent in the three days since the second-largest IPO in U.S. history, prompting investors to blame Morgan Stanley, the lead underwriter. The bank said it sent a copy of a revised prospectus that Facebook filed May 9 to all of its institutional and retail investors. The filing disclosed that Facebook’s advertising growth hasn’t kept pace with the increase in users.
“In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information,” Pendleton said in the statement. “These revised views were taken into account in the pricing of the IPO.”
William F. Galvin, Massachusetts’ secretary of the commonwealth, said his securities division subpoenaed Morgan Stanley over talks between Scott Devitt, the research analyst, and the firm’s institutional investors about Facebook’s revenue.
Those communications also may be “a matter of regulatory concern” to the Financial Industry Regulatory Authority, the industry-funded brokerage watchdog, and the U.S. Securities and Exchange Commission, Finra Chief Executive Officer Richard Ketchum said yesterday in an e-mail.
Ketchum didn’t say whether his Washington-based agency is investigating Morgan Stanley. John Nester, an SEC spokesman, declined to comment. Reuters reported on Ketchum’s remarks yesterday.
Research employees may communicate with investors if they don’t do it jointly with investment-banking employees or managers of the firm that’s going public, according to the terms of the 2003 Wall Street research settlement. Companies paid $1.4 billion to settle regulators’ allegations that they published misleading research to win investment-banking business.
The Jumpstart Our Business Startups Act, which became law last month, further relaxed restrictions on analysts who work for investment banks underwriting an IPO, said Jay Ritter, a professor of finance at the University of Florida.
“Under the JOBS Act, affiliated analysts are able to jump in and talk to institutional investors,” Ritter said.
Ken Sena, an analyst with Evercore Partners Inc., cut his 2012 revenue estimate for Facebook by 6 percent to about $5 billion after the May 9 filing, citing the social media company’s disclosures about users’ migration to mobile devices and ad-revenue growth.
General Motors Co. announced two days before the IPO was priced that it would suspend advertising on Facebook, and the social network “was emphasizing” that its mobile revenue per user was lower than for desktops, Ritter said.
“Any analyst who ignored that and kept the revenue growth rate estimates up wouldn’t have been doing a good job,” he said.