Get Ready for the Facebook Prosecutions

by Greg Pollowitz

Whoa. I would not want to be one of the investment bankers responsible for the Facebook IPO right about now. Henry Blodget writes:

And now comes some news about the Facebook (FB) IPO that buyers deserve to be outraged about.

Reuters Alistair Barr is reporting that Facebook’s lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow.

This by itself is highly unusual (I’ve never seen it during 20 years in and around the tech IPO business).

But, just as important, news of the estimate cut was passed on only to a handful of big investor clients, not everyone else who was considering an investment in Facebook.

This is a huge problem, for one big reason:

Selective dissemination. Earnings forecasts are material information, especially when they are prepared by analysts who have had privileged access to company management. As lead underwriters on the IPO, these analysts would have had much better information about the company than anyone else. So the fact that these analysts suddenly all cut their earnings forecasts at the same time, during the roadshow, and then this information was not passed on to the broader public, is a huge problem.

Any investor considering an investment in Facebook would consider an estimate cut from the underwriters’ analysts “material information.”

What’s more, it’s likely that news of these estimate cuts dampened interest in the IPO among those who heard about them. (Reuters reported exactly this–that some institutions were “freaked out” by the estimate cuts, as anyone would have been.)

Sheesh. Too bad Obama’s SEC missed this one. The rest here.

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