Shareholders sue Facebook, banks

Facebook’s shareholders are suing CEO Mark Zuckerberg and Morgan Stanley over allegations that weakened growth forecasts were hidden ahead of last week’s IPO.

The suit was filed in U.S. District Court in New York. The three plaintiffs claim they were damaged, but Facebook says the lawsuit is without merit. Morgan Stanley declined to comment.

On Tuesday, U.S. regulators said the issues around the IPO of Facebook should be reviewed. This demand put pressure on the company, its lead underwriter, Morgan Stanley, and the Nasdaq, which is also being sued for technical glitches during the IPO.

To date, Facebook shares have fallen 18.4% from their $38 IPO price, reducing the value of stock sold in the IPO by more than $2.9 billion.

Additionally, a Bloomberg report says more than 4% of Facebook’s outstanding shares may be held by hedge funds or investors shorting the stock, with Data Explorers having revealed that 4.3% of the company’s shares on the market are borrowed.

Standard and Poors Capital IQ analyst Scott Kessler rates Facebook a “sell,” with a 12-month target price of $30 per share. In particular, he said there are notable risks related to monetization, expansion, and corporate governance in a recent research report.

Read: What is Facebook really worth?

The stock is climbing, however, and is a reprieve for shareholders after a two-day decline followed the IPO. The stock is currently up US$1.03, or 3.3%, to US$32.03.

Read: Should clients invest in Facebook?

U.S. regulators are examining whether Morgan Stanley selectively informed clients of an analyst’s negative report about the company before the stock started trading. This new investigation comes on the heels of the current FBI investigation into JP Morgan’s massive trading loss. Shareholders are also suing, saying the company changed its risk model without proper notice.

Read: JP Morgan shareholders file lawsuits

Rick Ketchum, who heads U.S. market regulator FINRA, said yesterday that the question of Morgan Stanley’s conduct regarding the Facebook IPO is a matter of concern for both his organization and the SEC.

The top securities regulator for Massachusetts, William Galvin, said his office is investigating whether Morgan Stanley divulged to only some clients that one of its analysts had cut his revenue estimates for Facebook before the stock hit the market.

The bank says they “followed the same procedures for the Facebook offering that it follows for all IPOs, and procedures complied with regulations.”

Read: Active investing is here to stay for more insight the challenges facing IPOs in the current market.

Questions about the role played by Morgan Stanley, the lead underwriter for the deal, add to the confusion surrounding Facebook’s IPO – the most hotly anticipated stock debut in years, which raised $16 billion for the social networking company, valuing it at $104 billion.

Nadgaq CEO Robert Greifeld acknowledged to shareholders, “we clearly made mistakes within the Facebook listing.”

The stock itself has been a disappointment, falling $3.03 on Tuesday to close at $31 and another $7 since. It managed to add just 23 cents in its first hours of trading on Friday, then suffered a big decline Monday.

A Morgan Stanley analyst, Scott Devitt, cut his estimate for Facebook’s revenue this year to $4.85 billion from more than $5 billion. Reuters reported it was unclear whether Morgan Stanley had told only select clients about the reduced estimate.

The analyst cut his figures for Facebook while the company’s executives were shopping the stock to potential investors in a roadshow during the weeks ahead of the IPO.

Morgan Stanley says a significant number of analysts, including those from other firms underwriting the stock issue, had reduced their estimates for Facebook to reflect publicly available information about the company.

He was referring to a May 9 regulatory filing, which indicated a shift to mobile devices by many Facebook users might limit its revenue growth because it’s harder to serve up advertising on those platforms.

Morgan Stanley also says revised analyst views were taken into account in setting the offering price at $38 per share.

The SEC said on Friday that it was looking into problems surrounding the IPO. On Tuesday, the agency’s chairman, Mary Schapiro, said: “I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook.”