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Feds to Probe Facebook IPO; Stock Continues to Fall

May 22, 2012 (San Jose Mercury News, Calif.) On the third day of trading after its disappointing debut, Facebook's stock stumbled badly on Tuesday, as critics blasted the company and its underwriters for being greedy and over-pricing the initial offering and federal financial regulators called for a review of the ill-fated IPO.

As Facebook's share price fell steadily through the afternoon, closing down near nearly nine percent after losing more than 10 percent Monday, Securities and Exchange Commission Chairman Mary Schapiro suggested that authorities need to take a closer look at the most-hyped -- and perhaps most troubled -- IPO in tech history.

"I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate," Schapiro told reporters as she left a Senate Banking Committee hearing, "but there are issues that we need to look at specifically with respect to Facebook."

Fallout from Facebook's embarrassing launch unfolded on several fronts. As the stock closed at $31, more than 18 percent off its Friday launch price of $38, a Facebook investor filed a lawsuit against Nasdaq for first-day glitches that delayed and disrupted trading. Nasdaq, meanwhile, admitted publicly Tuesday that it would have pulled the plug on the IPO had it known the extent of technical problems in its system.

And while the head of the Financial Industry Regulatory Authority echoed Schapiro's call

for a review, Facebook stock buyers fumed over a report that a leading analyst at lead underwriter Morgan Stanley had apparently cut his revenue forecasts for Facebook in the days before the offering. One mutual fund source told Reuters they had never, in a decade of experience, seen an underwriter revise a company's outlook downward during a pre-IPO road show.

"The allegations, if true, are a matter of regulatory concern," said Rick Ketchum, chairman of the regulatory authority, an independent group that protects investors by making sure the securities industry is operating fairly and honestly.

Yet even as the stock sank, a growing chorus of analysts said Tuesday that Facebook was still over-priced and its share price could continue to falter in the coming days.

"It's getting nastier by the day," said Joe Magyer, senior analyst at Motley Fool, an investment advice website. The price slump is being driven by a "combination of Morgan Stanley getting a little too greedy and a botched execution of the IPO by Nasdaq. It's almost becoming a bit of self-fulfilling prophesy. A lot of people bought Facebook to make a quick buck. That didn't happen, and now they're just dumping their shares.

"Most of the pre-IPO shares went to the pros," he said, "and any individual who bought in is probably feeling really burned right now."

Magyer thinks the stock could fall further, saying "I'd be interested in Facebook at twenty bucks a share. It's a great business with a lot of potential, but the valuation is just too rich."

Trip Chowdhry, senior analyst for Global Equities Research, said Facebook's management and board of directors deserved much of the blame for the debacle. He said executives refused to answer key questions from analysts before the IPO. And instead of justifying the underwriters' initial valuation of the company with solid fundamentals, they allowed the hype to build, encouraging average investors to scoop up shares without a clear grasp of the risks they were taking. Chowdhry said while Facebook executives and the venture capitalists who sit on its board benefited from the IPO, it's the company's employees who may be hurt the most.

"These people who have sacrificed their personal lives for Facebook and were led to believe their stock would shoot up after the IPO are the ones who really got screwed," he said. "They were given stock at bubbling valuations that could never pan out.

"They made a mistake pricing the IPO," Chowdhry said. "Facebook's management was drinking their own Kool-Aid. Everyone believed the hype, but the hype was too strong."

San Jose Mercury News (San Jose, Calif.)

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