Facebook Fight Compounded by Main Street’s $600 Million Loss

Photograph by Peter DaSilva/EPA/Landov

The "Facebook Wall" at the new offices in Menlo Park, California.

The phrase “Facebook privacy fight” is about to take on a whole new meaning.

The Internet company’s nascent Washington lobbying team probably expected to spend a lot of time on the Hill and with regulators talking about privacy — the kind of consumer issues that would come up after Facebook agreed to settle FTC complaints that it failed to protect users’ privacy or disclose how their data could be used.

Instead Joel Kaplan — once deputy chief of staff for former President George W. Bush and now head of Facebook’s Washington office — and his crew will be talking about the company’s private disclosures. As in whether the company privately gave material information to analysts, and whether those analysts then privately shared those disclosures with select investors in the form of lower earnings projections.

Here’s the timeline so far: Facebook amended its IPO filing on May 9 to say growth in advertising had failed to keep up with user gains. It then contacted more than 20 analysts, including those at underwriters Morgan Stanley, Goldman Sachs and JPMorgan, to guide them toward the lower end of its second-quarter sales estimate, a person with knowledge of the matter told Bloomberg News.

A day after the filing, analysts called some investor clients to communicate their revised estimates, said people with knowledge of the process. For instance, Morgan Stanley cut its 2012 profit estimate to 48 cents a share from 51 cents and took the 2013 projections down by 5 cents to 83 cents, two people said.

Facebook spokesman Larry Yu declined to comment to Bloomberg, and a person close to the company said it didn’t give the analysts any materially different information than the updated prospectus. Morgan Stanley’s procedures in the offering are in compliance with all regulations, a spokesman for the bank said in a statement this week.

Complicating matters is that the IPO furor cost Main Street investors more than $600 million, according to Bloomberg’s Danielle Kucera and Douglas MacMillan. While big Wall Street names got in early, small-time investors had to wait until last week’s IPO for a stake.

Facebook allocated more than 25 percent of shares to these retail investors, said two people familiar with the offering. That means the value of stock bought by that group for $38 in the IPO has dropped by at least $630 million in total, based on the closing price of $32 yesterday and assuming investors held onto the stock.

House and Senate officials have their staffs gathering information about the IPO. Lead underwriter Morgan Stanley may face regulatory review over claims about the possible selective disclosure, the CEO of the Financial Industry Regulatory Authority said this week. The SEC may also review the offering.

“It might have been better for Facebook had they made more specific disclosures and made them publicly, because rather than a story of public outrage and disgust, the expectations might have been a bit more tempered in a healthy way,” Jeffrey Manns, professor of banking and securities law at George Washington University, told Bloomberg.

What do you think about this article? Comment below!