Earlier, we reported that the analysts at Facebook's IPO underwriters had cut their estimates for the company in the middle of the IPO roadshow, a highly unusual and negative event. "This was done during the road show - I've never seen that before in 10 years," said a source at a mutual fund firm who was among those called by Morgan Stanley. The company declined to comment when asked who was told about the research. Morgan Stanley did not return a call and email seeking comment. And, initially, there was a lot of institutional enthusiasm for the stock. (To infer that message from the language, you had to know that Facebook's first quarter had been weak--and that the cause had been the divergence between user growth and revenue growth.) The change in Morgan Stanley's estimates came on the heels of a May 9 Facebook filing of an amended prospectus with the U.S. Securities and Exchange Commission, in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices. For the second quarter of 2012, the new revenue estimate was $1.111 billion, down from about $1.175 billion previously, the person added. JPMorgan Chase and Goldman Sachs, which were also major underwriters on the IPO but had lesser roles than Morgan Stanley, also revised their estimates in response to Facebook's SEC filing, according to sources familiar with the situation. Scott Sweet, senior managing partner at the research firm IPO Boutique, said he was also aware of the reduced estimates. In the run-up to Facebook's $16 billion IPO, Morgan Stanley, the lead underwriter on the deal, unexpectedly delivered some negative news to major clients: The bank's consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company. The lower revenue estimate came shortly before the IPO was priced at $38 a share, the high end of an already upwardly revised projected range of $34 to $38, and before Facebook increased the number of shares being sold by 25 percent. The sudden caution very close to Facebook's initial public offering - while an investor road show was under way - was a big shock to some, said two investors who were advised of the revised forecast.
– Facebook's IPO is looking more disastrous by the day. Regulators are now probing reports that underwriter Morgan Stanley and other banks cut their revenue forecasts for the company just days before the IPO—but only advised major clients of the change. Insiders believe the revised forecast, which smaller investors were not advised of, contributed to the weak performance of Facebook shares, which finished more than 18% below the IPO price yesterday, costing investors close to $40 billion, Reuters reports. Regulators in Massachusetts have subpoenaed chief underwriter Morgan Stanley, and the SEC is reviewing the allegations The forecasts were cut after a tipoff from a Facebook exec, according to Business Insider, which notes that such "selective disclosure" is grossly unfair to investors at best and a violation of securities laws at worst. "There is no debating this is a misadventure of epic proportions," a Greencrest Capital analyst tells CBS. "This was supposed to be the chance to restore the public's faith in the public markets and in Wall Street," he says. "And instead, it's been a reminder of everything people suspected, feared, or hated about the public markets and Wall Street."