SEC officials would neither confirm nor deny whether the agency is conducting an investigation. But there are three major questions swirling around the troubled IPO: what caused the technical glitches that disrupted Facebook’s NASDAQ debut; whether Facebook gave privileged information to certain analysts and investors; and whether Morgan Stanley, the IPO’s lead underwriter, gave conflicting messages to different kinds of investors before the offering.
For some in Congress, if federal regulators come up empty-handed, that could be an even greater cause for concern. “This IPO is a poster child for all that’s wrong with current practices,” Sen. Richard Blumenthal (D-Conn.) said in an interview. Whether or not the SEC or other regulators bring down the hammer, he believes that Facebook’s IPO is a clear sign that capital markets are rigged against ordinary “mom and pop” retail investors.
Facebook closed Friday at $27.72 a share — down 27 percent from its May 18 debut price of $38.
Blumenthal pointed to questions about whether Facebook and Morgan Stanley selectively disclosed a big drop in the company’s revenue forecast, which caused some big investors to back out of the offering. Facebook amended its prospectus on May 9 to include the information, but a Morgan Stanley analyst informed some clients orally about the disappointing outlook. On its face, underscoring this public information to some investors and not others isn’t illegal, and federal regulators could end up agreeing there was no wrongdoing. But Blumenthal believes that what is standard practice for Wall Street unfairly advantages big institutional investors over the little guy.
“You wonder, isn’t there something wrong with this picture? Where the underwriters selectively pick [who should receive] information, then the public is not only permitted but encouraged to participate?” he said. Whether the SEC finds any enforceable violations, Blumenthal thinks there could be a need to review and expand securities regulations to help level the playing field when companies go public.
More specifically, Blumenthal and other Senate Democrats want to revisit the recently passed JOBS Act, which loosened regulations on IPOs for “emerging companies,” reducing their disclosure requirements to investors. Facebook was too large to qualify as an “emerging company,” but JOBS Act opponents think it strengthens their case that companies need to provide more, not less, information to retail investors.
“Effective capital markets require transparency and accountability, not one set of rules for insiders and another for the rest of us,” Sen. Sherrod Brown (D-Ohio) said in a statement last week. “The conduct in this highly publicized IPO only reinforces that the Senate was mistaken in voting to remove oversight from approximately 98 percent of all IPOs — for companies making less than $1 billion per year.”
Blumenthal said he plans to push for a hearing on the subject when the Senate returns next week. “I voted against the JOBS Act, and the Facebook IPO may be Exhibit A why we need to revisit some of the issues that were given so little attention,” he said.
Like their Democratic counterparts, Republicans have received briefings on the IPO from regulators and company executives, but they have remained relatively quiet about concerns on the issue. Neither the office of House Financial Services Chairman Spencer Bachus (R-Ala.) nor that of Sen. Richard Shelby (R-Ala.), the top Republican on the Senate Banking Committee, provided comment on the issue.
Facebook can’t publicly comment due to a mandatory 40-day quiet period after the IPO. Morgan Stanley suggests that some of the criticism was sour grapes from poorly informed investors. “People who thought they were buying this stock so they could get an enormous pop were both naive and ordered [shares] under the wrong pretenses,” chief executive James Gorman said Thursday on CNBC. “I’m confident that we followed exactly the procedures we follow.”
In fact, some of the IPO’s biggest critics on the Hill agree that Morgan Stanley was likely playing by the rules. After meeting with the SEC to discuss the issue, one Democratic Hill staffer said that “the takeaway I got from talking to them is that a lot of what happened wasn’t necessarily illegal under securities law.” But, he added, “It feels wrong, from an egalitarian standpoint.”
(Washington Post Co. Chairman Donald E. Graham is on the board of Facebook.)