(WASHINGTON) — Facebook and its IPO underwriters are being sued and face pointed questions from lawmakers about whether they misled some investors before the largest initial public offering by a tech company in U.S. history.
Facebook investors have filed a class action lawsuit against the company and its underwriters, saying the registration statement and prospectus filed with the Securities and Exchange Commission ahead of the IPO were “false and misleading.”
The class action lawsuit was filed on Wednesday in a New York District Court on behalf of Facebook stock purchasers against Facebook’s board, including CEO Mark Zuckerberg and CFO David Ebersman, Morgan Stanley and the other underwriters.
The suit alleges that Facebook failed to disclose that the company told the lead underwriters to reduce their 2012 performance estimates because more users are using its mobile apps, which don’t generate advertising revenue.
Facebook stock moved higher on Wednesday after two days of declines. Shares of the tech company are up about 2.5 percent to $31.76 in mid-day trading.
But while the company’s stock sees a slight jump, regulators have directed pointed questions at the tech company after its muted IPO on Friday.
On Tuesday, there was a report that Morgan Stanley and Goldman Sachs — investment bank underwriters supporting the IPO — told clients earlier this month that they were reducing their earnings forecasts for Facebook.
The Senate Banking Committee is conducting staff briefings with Facebook, regulators and other stakeholders to learn more about issues raised in the news regarding Facebook’s IPO, a committee aide told ABC News on Wednesday.
Facebook did not immediately respond to a request for comment.
Meanwhile, Massachusetts Secretary of State William Galvin has subpoenaed the tech company, investigating whether Morgan Stanley, the main IPO underwriter, told preferred investors that an analyst cut his revenue estimate based on the company’s S-1 filing before the IPO.
“If it turns out you have a pattern of conduct where preferred investors are getting special treatment that’s devastating to rebuilding confidence in the market,” Galvin told ABC News.
His office issued a subpoena to Morgan Stanley that seeks information about discussions the bank had with certain clients about Facebook’s IPO.
“It is so important that we not allow this situation to go uninvestigated,” Galvin said. “Given the breadth and size of the issue and the losses that are out there it’s important that we move rapidly.”
Facebook stock lost nearly 20 percent of its value in its first three days of trading on the NASDAQ.
“So many investors have lost so rapidly so much,” said Galvin. “We intend to move quickly. We need to get answers for average American investors.”
A spokesman for Morgan Stanley provided a statement regarding some of the allegations put forward against the investment bank, saying it “followed the same procedures for the Facebook offering that it follows for all IPOs.”
“After Facebook released a revised S-1 filing on May 9th providing additional guidance with respect to business trends, a copy of the amendment was forwarded to all of MS’s institutional and retail investors and the amendment was widely publicized in the press at the time.”
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. These revised views were taken into account in the pricing of the IPO. ”
A spokeswoman for JP Morgan Chase declined to comment about the lawsuits.
Copyright 2012 ABC News Radio
Patrick Ary, WAAY
Paul R. La Monica, CNN
Parija Kavilanz, CNN
Jackie Wattles, CNN