Earlier, we reported that the analysts at Facebook's IPO underwriters had cut their estimates for the company in the middle of the IPO roadshow, a highly unusual and negative event.
What we didn't know was why.
Now we know.
The analysts cut their estimates because a Facebook executive who knew the business was weak told them to.
Put differently, the company basically pre-announced that its second quarter would fall short of analysts' estimates. But it only told the analysts about this.
The information about the estimate cut was then verbally conveyed to sophisticated institutional investors who were considering buying Facebook stock, but not to smaller investors.
The estimate cut appears to have influenced the investment decisions of at least some institutional investors, dampening their appetite for Facebook stock, and crucially, affecting the price at which they were willing to buy Facebook stock.
As I described earlier, at best, this "selective disclosure" of the estimate cut is grossly unfair to investors who bought Facebook stock on the IPO (or at any time since) and didn't know about it.
At worst, it's a violation of securities laws.
This latest chapter in the Facebook IPO story began Tuesday morning, when Reuters' Alistair Barr reported that the research analysts at the company's lead underwriters -- Morgan Stanley, Goldman Sachs, and JP Morgan -- had cut their earnings estimates for Facebook during the company's IPO roadshow. This was highly unusual, if not unprecedented (I've been in and around the tech IPO business for almost 20 years, and I've never heard of it happening.)
Analysts cutting estimates is generally regarded as significant negative news for stocks. This is especially the case when the analysts who cut their estimates are very close to a company -- and, therefore, are thought to have particularly good information.
(In the old days, before the implementation of Regulation Fair Disclosure, companies used to manage the market's expectations by telling trusted analysts to change their estimates. Reg FD banned that practice.)
The fact that some potential Facebook investors were told of the analysts' estimate cuts and others were not would seem to be a major "selective dissemination" issue.The SEC and FINRA appear to have acknowledged this, and they may now investigate what happened.
It is inconceivable that a reasonable investor would consider the sudden reduction of the underwriter analysts' estimates to be immaterial to an investment decision.
More broadly, everyone is still trying to understand what happened with the pricing of the IPO, which was hyped up to be the offering of the century. We now have some more information on that.
Given the PR and legal disaster that the Facebook IPO is rapidly becoming, most official communications channels have gone silent. Facebook declined to comment. Morgan Stanley did not return a call and email seeking comment.
We have spoken to several sources familiar with aspects of the transaction. We do not have complete details yet, but a general picture of what happened is starting to take shape. For now, please regard most of the information below as scuttlebutt, as it has not yet been confirmed.
Click here to read the rest of the story.
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