Morgan Stanley is considering adjusting prices for trades made during Facebook Inc.’s initial public offering, as the lead underwriter and other banks face a fresh investor lawsuit over the how the deal was handled.
Morgan Stanley said it was reviewing orders placed by its retail brokerage clients for Facebook shares on a trade-by-trade basis and will make price adjustments if those clients paid too much for the stock, according to people familiar with the situation.
In a memo sent Wednesday to the nearly 17,200 financial advisers of its Morgan Stanley Smith Barney retail brokerage joint venture, the firm said it expects to make “a number” of price adjustments. Morgan Stanley didn’t specify in the memo how many orders haven’t been executed or how many are still pending, according to these people.
The orders in question occurred on Friday when Facebook made its market debut. The IPO was marred by trading glitches by the Nasdaq Stock Market, which delayed the start of trading in the social networking company by 30 minutes. Clients at Morgan Stanley and other brokerages also were left with orders that were processed improperly.
Morgan Stanley and two other underwriters, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., are facing criticism over their role as underwriters in the well-hyped Facebook offering. On Wednesday, three Facebook investors filed a civil lawsuit Wednesday in Manhattan federal court, alleging the company and its underwriters failed to properly disclose changes to analysts’ forecasts made at the underwriting banks.
The suit follows a report by Reuters that analysts at the Wall Street firms cut their revenue forecasts on Facebook amid the investor roadshow, a change that wasn’t widely disseminated.
Late Tuesday, Massachusetts sent a subpoena to Morgan Stanley following the reports. Several other plaintiffs’ lawyers have said they filed suits over the offering in other courts throughout the country, but Wednesday’s investor suit focused specifically on the revelations about the analysts’ changes.
That suit, which is seeking class-action status, alleges changes made to Facebook’s offering document a week before the IPO priced didn’t accurately portray the impact on Facebook’s revenue growth.
Facebook had said in an amended filing that its mobile users were growing rapidly in the second quarter but that advertising revenue wasn’t keeping pace. Following that report, several independent analysts issued new projections on revenue that were widely reported.
But, the suit alleges, underwriter analyst opinions—which also followed Facebook’s amended filing—would have made it clearer the new disclosure was “material.”
Though the changes by the underwriters were verbally communicated to some, according to people familiar with the matter, analysts at underwriting banks aren’t allowed by regulators to release published reports.
Wednesday’s lawsuit alleges the underwriters only “selectively disclosed” the analyst opinions, benefiting only some ahead of the IPO, which has underperformed hyped expectations.
Goldman Sachs and J.P. Morgan declined to comment.
Morgan Stanley said in a statement Tuesday that it “followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations.” The statement added that the analyst views were “taken into account in the pricing of the IPO.”
Facebook said in a statement that it believes the lawsuit is without merit and will “defend ourselves vigorously.”
Facebook’s shares had suffered a sharp drop since the IPO, dropping 18% through Tuesday’s close, before rebounding Wednesday up 3.2% to $ 31.99.
Write to David Benoit at email@example.com