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Many parties blamed in Facebook stock drop

Published: May 23, 2012 | 7:45 am
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Let the Facebook Inc. finger-pointing begin.

After one of the most anticipated initial public offerings in history, Facebook’s 19 percent drop this week prompted investors to fault everything from Morgan Stanley’s role as lead underwriter, to the company’s greed, to the Nasdaq Stock Market.

“It was like the gang that couldn’t shoot straight,” said Michael Mullaney, chief investment officer at Fiduciary Trust in Boston.

Taking the most heat is Morgan Stanley, Mullaney said. It was lead underwriter among the 33 firms Facebook hired to manage the $16 billion sale of stock. The bank decided with Facebook executives to boost the size and price days before Thursday’s IPO, ignoring advice from some comanagers, said people with knowledge of the matter who declined to be identified because the process was private.

Had Facebook kept the original terms, investors may have had a better shot at a first-day pop. The stock was little changed in its debut because Morgan Stanley intervened to keep it from falling below the IPO price. The shares fell 8.9 percent to $31 Tuesday, after an 11 percent drop Monday.

Just days before Facebook raised the size and price of its IPO, it began telling analysts to lower their sales forecasts, people familiar with the matter said. And Morgan Stanley could face regulatory scrutiny over claims that an analyst shared negative news about Facebook with institutional investors before that firm’s initial public offering last week, according to the head of the Financial Industry Regulatory Authority.

The decision to boost the price range reflected the demand in the market, said a person involved in the process. Spokesmen for Goldman Sachs and Morgan Stanley declined to comment. A JPMorgan spokeswoman declined to comment. Underwriters didn’t say how big the demand was.

Morgan Stanley and Facebook see problems with Nasdaq’s computer systems as one reason for the IPO’s performance, according to people familiar with the matter. Nasdaq’s trading platform was overwhelmed by order cancellations and updates that made it unable to finish the auction required to open trading. The Securities and Exchange Commission said it would review the trading.

Nasdaq chief executive officer Robert Greifeld said on a call with reporters on Sunday that the opening delay “had no apparent impact on the stock price,” noting that the share decline began after all brokers had received confirmation about their trades in the opening auction.

Facebook CEO Mark Zuckerberg and the early backers should be held accountable for the stock drop, said Francis Gaskins, president of researcher IPOdesktop.com. Goldman Sachs, Accel Partners, Digital Sky Technologies, and other holders boosted the number of IPO shares they offered in Facebook last Wednesday, a day after the company increased its price range.

“It’s a combination of Zuckerberg’s ego for that $100 billion market cap, and the shareholders selling who wanted an exit,” Gaskins said. “Somehow it just missed them that this was mispriced.”

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