No one is covering themselves in glory in the aftermath of the Facebook IPO.
Lead underwriter Morgan Stanley is battling allegations that it priced the deal too richly.
Facebook insiders are being called greedy for the last-minute increase in the number of shares they sold in the offering.
Facebook’s management is being criticized for signaling analysts to lower their revenue estimates just days before the deal priced – a move that could be a violation of securities laws. It also appears some institutional investors were informed of the analysts’ downgrade but retail investors were not.
If all that wasn’t enough, Nasdaq has endured a barrage of complaints for breakdowns in its system on the first day of trading that left investors in the dark about the status of their orders.
Predictably, regulators are launching investigations, legislators are scheduling hearings and plaintiff attorneys are filing lawsuits.
This is hardly the place Facebook wanted to be after completing its IPO. Nor is it encouraging to other firms that are thinking about going public.
Morgan Stanley is clearly in the hot seat. The firm issued a statement late Tuesday defending its actions, but it is standing on narrow ground, asserting that its procedures were “in compliance with all applicable regulations” and that it handled Facebook in the same manner as every IPO. That’s not enormously reassuring but it may be all it can say right now as it gathers the facts.
Nasdaq also has a lot to answer for. Its systems are meant to handle high transaction volumes, and its people are expected to test and monitor the infrastructure to prevent these kinds of problems. It’s not reassuring to hear Nasdaq executives admit they underestimated the scale of the technical problems. Nasdaq needs to give guidance quickly on how it will address investor losses and repair the weaknesses in its systems.
Even if Facebook shares recover, the events of the past few days will linger in the minds of investors. It’s too early to know if it will lead to changes in the IPO book-building process, which hasn’t changed much in the past half-century. If it does, Facebook in its own way will disrupt Wall Street, just as it upended the media and technology sector.