Will Zuckerberg “Friend” The SEC?

May 31, 2012

By: Douglas K. Rosenblum

In one of the most anticipated IPOs in history, Facebook (NASDAQ: FB) shares hit the market on Friday, May 18, 2012.  What first appeared to be sweet success for the multi-billion dollar company quickly turned sour, as the share price rose from $38 to $42.05, then fell to $28.84 at the close of the market on May 29, 2012.  With Facebook shares having now lost more than 24% of their market value in less than two weeks of trading, government regulators have sat up and are taking notice.

From the opening bell, Facebook’s IPO suffered from a perfect storm of technical difficulties – a true irony for the social media giant.  Investors who placed orders ahead of the market’s opening on May 18th learned that their orders had not been processed due to a technical error.  When trading began after 11 a.m., many were left to wonder whether their orders were processed and at what price.  NASDAQ Chief Executive Bob Greifeld reminded shareholders that the this was NASDAQ’s largest IPO, and the exchange processed over 570 million shares on May 18th alone.  A suit filed on May 22, 2012 in Manhattan federal court seeks class action status for those investors who claim to have been damaged by the mishandling of Facebook stock orders.

NASDAQ’s technical difficulties could turn out to be the least of Facebook’s problems.  As Security and Exchange Commission Chairman Mary Schapiro exited a recent Senate Banking Committee hearing, she commented, “I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook.”  Similarly, Chairman and Chief Executive Officer of the Financial Industry Regulatory Authority, Richard Ketchum, expressed concern: “[This] is a matter of regulatory concern to us and I’m sure to the SEC.  And without saying whether it’s us or the SEC, we will definitely be focusing on it.”

The focus of Ketchum’s comments is a report by Reuters that the lead underwriter for Facebook’s IPO, Morgan Stanley, cut its revenue forecasts for Facebook in the days prior to the IPO.  This information affected  Facebook’s value, and the information may not have reached many investors prior to the stock offering.  Other underwriters on the IPO, JP Morgan Chase and Goldman Sachs, also revised their estimates prior to the sale.  One serious concern is the level of information made available to different types of investors.  Institutional investors allegedly received information about the public offering that retail investors did not.

In the wake of the financial crisis dating back to 2008 and the resulting Dodd-Frank legislation, the SEC has become more proactive and vigilant on matters large and small alike.  While news since the IPO has focused more prominently on Facebook CEO Mark Zuckerberg’s recent nuptials and co-founder Eduardo Saverin’s renunciation of his American citizenship, the focus will undoubtedly shift back to what is sure to be intense scrutiny by government watchdogs.

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