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Underwriters blasted as Facebook shares sink again

Facebook shares sank further Tuesday amid new accusations that key underwriters had cut their forecasts for the company just days before Friday's initial public offering. Investors also launched legal action over the IPO, with the state of Massachusetts subpoenaing lead underwriter Morgan Stanley over how it promoted the shares, and another disgruntled investor reportedly suing Nasdaq over trading glitches that caused losses. On a day in which the overall market traded flat, Facebook shares lost another 8.6 percent Tuesday, closing at $31.12, leaving them 18.1 percent below the IPO price. Some $17 billion in market capitalization was wiped from the company, which launched on the market at a spectacular $104 billion valuation last week. The shares continued to fall in after-hours trade, falling to as low as $30.72, as analysts and investors concluded that the $16 billion, 421 million shares IPO was just too big for the real demand and that major early institutional investors had not intended to hold on to them. Underwriters had tried to prop up the trade at the $38 issue price on Friday, but gave up on Monday and Tuesday as selling became too heavy. "They issued too many shares and the market wasn't ready to absorb them, that's all there is to it. The market isn't ready to absorb it," said Michael Pachter of Wedbush Securities. The sell-off sparked more finger pointing and anger from those who had expected the price to zoom to massive gains such as the immediate doubling of career-oriented social network LinkedIn's IPO price last year. "Investors are searching for someone to blame and there are plenty of suspects," said Paul Ausick at 24/7Wall St. Analysts blamed Morgan Stanley for allowing Facebook last week to increase the price and the offering size to 421 million shares, raising $16 billion. "The underwriters placed the stocks with people who really were not that committed to owning it, and so a lot of them sold it," said Pachter. "They sent us false signals by adding 84 million shares to the offering on Wednesday, so right before they went public," he said. "They were wrong, they completely blew it." On Tuesday reports surfaced that Morgan Stanley and two other key underwriters, JP Morgan and Goldman Sachs, had cut the forecasts they provided to their customers days before the issue. The changed forecasts came after Facebook itself amended its IPO filing with the Securities and Exchange Commission with data that was less positive about its performance in the mobile market compared to earlier filings. In a statement Morgan Stanley said it followed all appropriate procedures in the IPO, including disseminating the update Facebook filing, the "S1", to all of the company's institutional and retail investors. "In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information," the banks said in a statement. "These revised views were taken into account in the pricing of the IPO. Separately a source close to the matter told AFP that nothing was hidden. "Last Monday (May 14) Facebook filed an updated S1 in which they gave some updated information about their financial performance," the source said. "I believe in response to that, analysts for the three bookrunners, their research departments gave updated information about analysis that they put out." "That was included in updated documents for the offering for all the investors on the deal," the source said. There was little information on how regulators viewed the episode. "If true, the allegations are a matter of regulatory concern to FINRA and the SEC," Rick Ketchum, the chief executive of the Financial Industry Regulatory Authority, said in a statement. Dow Jones Newswires, meanwhile, reported that the government of the state of Massachusetts had issued a subpoena to Morgan Stanley related to a company analyst's discussions with institutional investors ahead of the Facebook IPO. Dow Jones also reported that a lawsuit was filed in the New York District Court Tuesday against the Nasdaq market for losses linked to computer problems in the first days of Facebook trade. And a New York Law firm, Levi & Korsinsky, announced it was looking into investors' potential claims arising out of any allegedly unfair dispersal of information by the underwriters.