Lawsuits and regulatory investigations turn IPO into a black eye for Facebook, underwriters and Nasdaq

Facebook, its underwriters and the Nasdaq exchange continue to face scrutiny over the company’s $16 billion initial public offering, as a number of investors have filed lawsuits and regulators have called for investigations.

Facebook’s stock closed at $32 today, up more than three percent since yesterday but still down from its $38 IPO price. Here we’ll recap the two main issues causing this onslaught of controversy and discuss what has happened so far as a result.

First were technical issues with the Nasdaq, which many claim led to botched trades on Friday when Facebook went public. The exchange had said it would set aside $13 million to cover compensation costs, but Nasdaq OMX Group was then sued on Tuesday by an investor claiming the exchange was negligent in handling orders for Facebook shares. Nasdaq representatives now say that if they had fully realized the extent of the technical problems they faced, they would have delayed the IPO. Facebook is reportedly getting pitches from the New York Stock Exchange to switch its listing.

The other controversy involves underwriters Morgan Stanley, JPMorgan Chase, Goldman Sachs and others, as well as Facebook itself. Reports claim underwriters’ analysts reduced their earnings projections for the social network during the company’s roadshow, but did not make the change widely available to potential investors. According to Reuters, the banks are now forecasting 30.4 percent year-on-year 2012 revenue growth on average, instead of the 36.7 percent growth previously expected. In 2011, Facebook’s revenue grew 87.9 percent year-on-year to $3.71 billion. Another report says Facebook executives were involved in suggesting analysts revise their estimates.

As such, lawsuits have been filed in New York and California on behalf of investors who claim they had a legal right to know about the lower growth forecasts before the IPO. The underwriters, Facebook and its executives are listed as defendants in these suits.

According to Reuters, the U.S. House and Senate committees that oversee financial sector matters are planning to look into the allegations — as are the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Massachusetts Commonwealth.

Morgan Stanley said in a statement Tuesday that it “followed the same procedures for the Facebook offering that it follows for all IPOs.” Facebook did not provide comment about the regulatory inquiries, but regarding the lawsuit, spokesperson Andrew Noyse said in a statement, “We believe the lawsuit is without merit and will defend ourselves vigorously.”

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