It was just the kind of information that could make you a million. But you couldn’t find it on Facebook or, for that matter, anywhere else on the Internet.
In mid-May, as the social-networking company prepared for a public sale of its stock, an analyst at Morgan Stanley began advising clients orally that Facebook profits would probably be lower than previously estimated.
The fact that the analyst worked for Morgan Stanley, which was the lead bank arranging for the sale of the company’s stock, added credibility to his analysis. At just about the same time, other analysts working for banks affiliated with the sale similarly reduced their earnings estimates.
The investors who received and took note of these warnings may have saved lots of money: As many investors now know all too well, the value of Facebook stock rose briefly on its first day and has since plunged 16 percent from its original price.
Now federal regulators, shareholder attorneys and angry investors are looking askance at the hype — and company disclosures — that attended the lead-up to last week’s ballyhooed Facebook stock sale.
They want to know whether the company and the banks that arranged the sale pulled one over on ordinary investors, against whom the odds are often stacked in initial public offerings.
“The true facts at the time of the [sale] were that Facebook was then experiencing a severe and pronounced reduction in revenue growth,” according to a lawsuit filed Wednesday against the company, its directors, Morgan Stanley and other banks affiliated with the sale.
(Washington Post Co. Chairman Donald E. Graham is on the board of Facebook and is named in the lawsuit.)
A raft of complex regulations attempt to ensure that the information public companies give out to investors is not only true but is distributed in a way that does not favor big institutional investors over so-called retail investors.
The Securities and Exchange Commission has confirmed that it is looking at the Facebook IPO, although it has not publicly described its focus.
Massachusetts regulator William Francis Galvin said his office has subpoenaed Morgan Stanley “in connection with discussions by their analyst with certain institutional investors about the revenue prospects for Facebook” before the IPO.
The Financial Industry Regulatory Authority, an industry watchdog, also has jurisdiction. The organization’s chairman and chief executive, Richard G. Ketchum, told Reuters it would be “a matter of regulatory concern” if Morgan Stanley shared negative news with institutional investors before the IPO.
But FINRA spokeswoman Michelle Ong said by e-mail that the matter has been “blown out of proportion” and that Ketchum “was not even saying that we are planning to look at it.”
“Until we unwind the facts and circumstances surrounding this situation, it is inappropriate to speculate about what potential violations may have occurred,” Ong said.
Companies such as Facebook are prohibited from selectively disclosing important information to favored analysts or investors.
Anything investors are entitled to know about the IPO is supposed to be included in a dense document known as a prospectus, which is filed with the SEC and is sometimes revised repeatedly in the run-up to the sale.
Wall Street analysts, however, are not required to share their research with the general public. Recent legislation called the JOBS Act could significantly loosen restrictions on research reports by stock underwriters, at least for companies with up to $1 billion of annual revenue.
Exactly which investors were given the briefings, and what those briefings involved, has been difficult to assess, largely because the analysts’ revised estimates were communicated to clients orally, according to people familiar with the matter, who insisted on anonymity.
What is known is that on May 9, Facebook amended its prospectus, which is what many investors use to make their decisions. The amendment involved information about a potential problem for the company.
“Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results,” it said.
This spurred the Morgan Stanley analyst, as well as analysts at the other involved banks, to lower their estimates of what Facebook might make, according to a statement from Morgan Stanley.
But skeptics of the company and the banks argue that the amendment was hardly specific enough to have spurred the analysts all at once to revise their earnings forecasts. Some have accused the banks of providing more information to select investors than to the general public — which, even if true, was not necessarily prohibited.
“ ‘The analyst was just sitting in the park when this idea came to him’ — good luck with that one,” said Darren Robbins, one of the plaintiffs’ attorneys in the lawsuit filed Wednesday.
With more than $2 billion of investors’ money disappearing since the Facebook shares went on sale, many investors are angry. But some experts argue that the publicly available information should have been enough to give investors fair warning. The trouble that companies like Facebook have in making money from mobile devices, where ads are harder to deploy, have been well known.
“Now people are looking for scapegoats,” said Francis Gaskins, president of IPO Desktop. “People are saying, ‘Woe is me,’ but I’m saying, ‘Sorry, do your own research. Don’t be the victim.’ ”