The Hill's intrigue comes as other financial watchdogs are taking a closer look. | REUTERS Congress looking at Facebook IPO

The frenzy over Facebook's IPO has cooled on Wall Street, but now Capitol Hill wants answers.

Lawmakers are concerned about reports that banks underwriting the deal may have lowered growth forecasts on Facebook’s revenue and only told some large investors — and not retail investors — in a way that violates securities law. In addition, they want a better explanation about technical glitches that botched the first day of trading.


“I have instructed my staff to conduct due diligence regarding issues raised in the news about Facebook’s IPO,” said Sen. Tim Johnson (D-S.D.), chairman of the Senate Banking Committee, noting his staff is now coordinating “bipartisan staff briefings with Facebook, regulators and other stakeholders.” Johnson said he would wait for more information before making a decision on a hearing.

( Also on POLITICO: Facebook stock edges up on opening)

Meanwhile, the House Financial Services Committee is also gathering information and receiving briefings, a spokeswoman said. "While no hearings specifically focused on this IPO are planned at this time, the committee will have hearings over the coming weeks where this topic is likely to be raised," the aide added.

The Hill's intrigue comes as other financial watchdogs are taking a closer look at the technical glitches that inhibited Facebook’s mammoth first day of trading on the Nasdaq on Friday. They’re also concerned about reports that the IPO underwriters — Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America — lowered growth forecasts on Facebook revenue in a way that violates securities law.

Facebook got off to a rocky start as a public company Friday as the IPO was delayed because of trouble with Nasdaq’s system. Afterwards, the stock repeatedly came close to dipping below the initial offering price of $38, only staying above the line because underwriters helped keep it afloat. By noon Wednesday, Facebook shares were trading below $32 per share.

Some are now attributing the spiral downward to the conduct of Morgan Stanley and others. A lead underwriter of Facebook's IPO, the bank may have revised downward its revenue projections — information that some big investors may have received but not many other, smaller Facebook investors, according to a number of reports.

The full details of the incident are unclear, but other top Wall Street banks may have similarly lowered their projections. Depending on how the information was communicated and to whom, the activities could run afoul of securities laws.

The SEC declined comment earlier this week. But the agency's chairman, Mary Schapiro, told reporters after a congressional hearing that day there are "issues we need to look at," though she did not further elaborate. The SEC had previously suggested it would look into the trading difficulties with Nasdaq last week.

The Financial Industry Regulatory Authority, the independent regulatory body that oversees securities firms, only went as far as to say there could be a need to review the situation if the news about Morgan Stanley's involvement plays out.

"If true, the allegations are a matter of regulatory concern to FINRA and the SEC," said Rick Ketchum, its chairman and CEO, in a statement.

For now, the troubled IPO is attracting scrutiny on Capitol Hill, particularly after members of Congress only recently loosened some of the restrictions on investors and startups.

Rep. Maxine Waters (D-Calif.) told POLITICO in a statement Wednesday that the IPO deserves Hill attention because it suggests retail investors received the short end of the stick. She also stressed the importance of oversight given lawmakers' passage of the JOBS Act, which had an IPO component that some members — including Waters — felt was weak.

"I remain concerned with the IPO portions of the act, particularly as they relate to the erosion of the firewall between analysts and underwriters at investment banks, which I think will undermine the basic integrity of IPO-related research," she said.

Sen. Sherrod Brown (D-Ohio) sounded a similar note Wednesday. He said in a statement that the "SEC must fully investigate and take appropriate action if it discovers any violations. The conduct in this highly publicized IPO only reinforces that the Senate was mistaken in voting to remove oversight from approximately 98 percent of all IPOs — for companies making less than $1 billion per year."

Outside of the Beltway, investors have mobilized to file a class action case against Facebook and the underwriting banks for the way in which they lowered growth forecasts before going public. And a Massachusetts regulator has already subpoenaed Morgan Stanley for information.

Responding to the lawsuit, a Facebook spokesman said: "We believe the lawsuit is without merit and will defend ourselves vigorously." The company did not comment further on the incident or on the difficulties Nasdaq experienced with Facebook first day of trading Friday.

Nevertheless, the suspected incident may compound a slew of unrelated technical difficulties that hampered or delayed Facebook's first day of trading. The sheer volume of market moves seemed to overwhelm Nasdaq, preventing some investors from receiving confirmations of their trades. Arguably, some attributed Facebook's lack of first-day share bounce — often, the gold standard in measuring IPOs — to the glitches that early on delayed trading.

No matter the outcome, the events this week seem to be in contrast to the outlook leading up to Facebook's IPO.

Even amid concerns about Facebook's ability to monetize mobile and advertising, the social-media giant appeared to enter Friday strong and confident. It had revised up its price range and expanded the amount of stock it would make available, and its lead underwriters had touted the historic demand — from even amateur investors — as Facebook took its financials on the road.

This article first appeared on POLITICO Pro at 1:03 p.m. on May 23, 2012.