US REGULATORS will investigate claims that Morgan Stanley shared negative news about Facebook with major clients in the lead up to its initial public offering.

Allegations are flying that the IPO's lead underwriter Morgan Stanley only told its top clients it had reduced its revenue forecast for the tech giant, and did not spread the word to other investors.

Analysts at Morgan Stanley, JP Morgan and Goldman Sachs reportedly cut their revenue forecast after a tip from a Facebook executive "who knew the business was weak", Business Insider reported.

The three underwriters downgraded their revenue forecasts after Facebook released a small revision to its IPO filing on May 9, which warned investors that it had no immediate plans to monetise its mobile site.

But Insider reported that it was “inconceivable" that all three analysts could have read the language and concluded independently that Facebook’s profit was weak.

Forecast info "selectively shared"

The forecast downgrade was reportedly told verbally to institutional investors at Morgan Stanley who were considering Facebook stock, but not to smaller investors.

Morgan Stanley isn’t allowed to publish earnings estimates until 40 days after the IPO, Reuters reported.

Technically it’s not illegal for Morgan Stanley to verbally tell major clients about estimates, but critics have said such a move is “grossly unfair” to smaller investors.

The state of Massachusetts has subpoenaed the brokerage firm over its discussions with investors on Facebook.

"The Securities Division has put out a subpoena to Morgan Stanley in connection with the analyst's discussion with certain institutional investors about the revenue prospects for Facebook,'' a spokesman for Massachusetts Secretary of Commonwealth William Galvin said.

This came as Facebook CEO Mark Zuckerberg completed the $US1.1 billion transaction of 30.2 million shares that he sold in the company's IPO, the LA Times reported.

He sold them for $37.58 a pop, but will be spending most of the money raised to cover taxes, according to a document filed with the Securities and Exchange Commission.

Full compo for investors "unlikely"

But not all investors have been so lucky, with some still waiting to find out if their trades from Friday have even gone through.



Nasdaq sent out an alert to investors who had lost money due to technical glitches on the first day of trading, telling them they could be eligible for compensation if they submitted their claims by midday Monday New York time (2am yesterday AEST).

This caused investors to sell off their shares so they could file a claim with the Nasdaq.

Sandler O’Neill analyst Rich Repetto says this alert could have inadvertently caused Monday’s massive stock price plunge.

But the likelihood of investors getting full compensation is “very unlikely,” Mr Repetto told CNBC, because Nasdaq’s liability for tech glitches is limited to a $US3 million for the month.

The Nasdaq is pushing regulators to allow it to pay out $US10 million more in this particular case.

Nasdaq "would have pulled the IPO"

A senior Nasdaq official said the index would have pulled the plug on Facebook's IPO if it had known the extent of technical problems.

The Wall Street Journal reported that Nasdaq’s head of transaction services said the index "by no means would have gone forward" with the IPO if it had known the problems would disrupt a "normal trading day."

In a separate case, another disgruntled investor is reportedly suing Nasdaq over the trading glitches that caused losses.

The mishandling of the Facebook IPO affected an estimated 30 million shares, according to Nasdaq executives, and losses across Wall Street stemming from the episode have been estimated at tens of millions of dollars.

Share price takes another beating

Facebook shares sank further this morning amid the Morgan Stanley accusations – they lost another 8.6 per cent to close at $US31.12, leaving them 18.1 per cent below the IPO price.

Some $US17 billion in market capitalisation was wiped from the company, which launched on the market at a spectacular $US104 billion valuation last week.

The shares continued to fall in after-hours trade, falling to as low as $US30.72, as analysts and investors concluded that the $US16 billion, 421 million shares IPO was just too big for the real demand and that major early institutional investors had not intended to hold on to them.

Underwriters had tried to prop up the trade at the $US38 issue price on Friday, but gave up on the second and third days of trading as selling became too heavy.

Too many shares offered, say analysts

Analysts blamed Morgan Stanley for allowing Facebook last week to increase the price and the offering size to 421 million shares.

"They issued too many shares and the market wasn't ready to absorb them, that's all there is to it. The market isn't ready to absorb it," said Michael Pachter of Wedbush Securities.

"The underwriters placed the stocks with people who really were not that committed to owning it, and so a lot of them sold it."

Mr Pachter said they sent "false signals" by adding 84 million shares to the offering right before they went public.

"They were wrong, they completely blew it," he said.

Reports today that Morgan Stanley and two other key underwriters, JP Morgan and Goldman Sachs, had cut their revenue forecasts came after Facebook itself amended its IPO filing with the Securities and Exchange Commission with data that was less positive about its performance in the mobile market just days before the IPO.

In a statement Morgan Stanley said it followed all appropriate procedures in the IPO, including disseminating the update Facebook filing, the "S1", to all of the company's institutional and retail investors.

"In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information," the banks said in a statement.