Regulators Eyeing Morgan Stanley Facebook Flub (Update 1)

NEW YORK ( TheStreet) -- The Massachusetts Secretary of State is issuing a subpoena to Morgan Stanley ( MS) over allegations that it may have communicated negative news about Facebook's ( FB) IPO to select clients, according to press reports.

An official spokesperson for the office could not be reached for comment.

Reuters reported earlier that an analyst at Morgan Stanley, the lead underwriter of the IPO, had cut earnings estimates days before the pricing of the Facebook IPO.

The move was prompted by a revision in Facebook's prospectus in which the social networking giant expressed caution about ad revenue growth on the rapidly expanding mobile platform.

The article raised questions about whether Morgan Stanley had communicated its earnings downgrade to only its top institutional clients or more broadly.

Underwriters are barred from issuing recommendations on a the stock until 40 days after an IPO begins trading. Companies going public are also barred from making financial forecasts prior to an IPO and communicating material information to analysts that is not available to all investors.

The report attracted the scrutiny of regulators including FINRA and SEC on Tuesday.

Finra Chairman and CEO Richard Ketchum said the allegations, if true, were a matter of "regulatory concern", according to Reuters.

Separately, SEC Chair Mary Schapiro also told reporters that the regulator will look into issues surrounding the Facebook IPO, as it was a matter of restoring trust in the system.

Shares of Facebook dropped nearly 9% to $31 on Tuesday. The stock of Morgan Stanley managed to finish modestly higher by 0.9%, but was slipping 1.4% in aftermarket hours.

"Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations," Morgan Stanley said in an emailed statement, adding that "all research was widely publicized in the press at the time."

"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. These revised views were taken into account in the pricing of the IPO," Morgan Stanley added.

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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