CNN- At this point, there's little question that Facebook's IPO was a disaster. But was it illegal?
That's the question lawyers, regulators, and other observers are asking as allegations swirl that major clients of Morgan Stanley (MS, Fortune 500) and other banks involved in the offering may have had access to privileged information ahead of the stock's debut.
"We need to be assured that everyone, every investor, gets treated the same," William Galvin, the secretary of the Commonwealth of Massachusetts, told CNN Wednesday. Galvin has issued a subpoena to Morgan Stanley seeking information about the bank's contacts with clients ahead of Facebook's IPO last week.
Law enforcement officials have not formally accused either Facebook (FB) or the banks that underwrote its IPO of wrongdoing. On Wednesday, however, lawyers representing investors who purchased Facebook stock filed suit against the tech giant and the banks involved alleging that they withheld information that should have been disclosed in public documents.
In particular, the suit claims that Facebook executives told the underwriter banks to lower their revenue projections for the company, and that the banks relayed this information to favored clients but not to the general public.
If true, this would likely be in violation of federal securities law, which dictates that all "material information" -- facts that could influence investor decisions -- be disclosed by public companies and companies planning to go public in their filings with the Securities and Exchange Commission.
Documentation to support this claim is not provided in the lawsuit, though Darren Robbins, a lawyer for the plaintiffs, said his team had access to "witnesses and shareholders and other sources of information."
Morgan Stanley, JPMorgan (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Goldman Sachs (GS, Fortune 500) did indeed revise their revenue projections for Facebook shortly before its IPO, according to Reuters, though these revisions came after Facebook filed amended documents with the SEC. The company had previously disclosed its difficulties generating revenue from users on mobile devices, and in a May 9 filing, it said these problems had continued.
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Within the next two days, Reuters said, the four banks' research departments lowered their estimates. Those estimates were later communicated to major investors but not the general public.
Underwriters -- the banks that handle an IPO -- have close contact with a company before it goes public, though they are subject to restrictions on what can be shared between their research divisions and bankers working directly on the IPO. This is in order to prevent conflicts of interest that could lead to misleading research.
Researchers at underwriter banks are prohibited from publishing analysis about the firm until 40 days after the IPO, though they are permitted to discuss their views with clients orally under certain conditions.
A crucial question is whether the banks' analysts lowered their estimates based solely on Facebook's public filings, or if they received additional information from the company that was not made public.
"Those analysts didn't have a miraculous epiphany concurrently and modify those numbers," said Robbins, the lawyer for the Facebook investors.
If the estimates were based only on public information, investors may have trouble prevailing in a lawsuit, said Dominic Auld, a lawyer at the firm Labaton Sucharow who specializes in litigation on behalf of shareholders. Auld's firm in not involved in the suits against Facebook but may consider joining at some point.
"If they feel different about this company based on the fundamentals ... banks have the right to do that, to change their viewpoints," Auld said. "I don't think that's actionable."
Morgan Stanley, the lead underwriter of the IPO, has maintained that this was indeed the case.