Facebook Inc (NASDAQ:FB)’s May 2012 IPO was not your average initial public offering. Not only was it a large IPO, it was Facebook, which meant almost everybody wanted a piece of the new offering. However, things went south fast. First, a major computer glitch hit the NASDAQ market system shortly after the shortly after Facebook shares debuted, resulting in a huge snafu and big losses for brokers. Second, it turned out the lead underwriter of the IPO had downgraded the firm just days before the IPO and told its large clients about the downgrade before publishing the report.

Facebook logo

In the aftermath of the public stink, the SEC launched a probe to see if the company had appropriately disclosed its advertising revenue before the IPO. In its recent quarter earnings report with the SEC, Facebook noted that the SEC “had terminated its inquiry and that no enforcement action had been recommended.”

Analysts note that although Facebook Inc (NASDAQ:FB) has been cleared in the SEC’s probe, the regulators may still be investigating the IPO underwriters, including Morgan Stanley.

Company shares lost almost half their value within a few months of the Facebook IPO, but have recovered nicely over the last year and change to trade above $75.

Morgan Stanley analysts downgraded Facebook

An investigation uncovered that just before the Facebook IPO, “independent” analysts working for the underwriters lowered their forecast price for the stock based an a downgrade of Facebook Inc (NASDAQ:FB)’s ad revenue. Moreover, the underwriters told their large clients about it, but smaller, private investors never got tipped off. Within a few months the $38 per share IPO had lost nearly half its value to trade around $20.

Standard practice

In defending its actions, the lead underwriter of the Facebook IPO, Morgan Stanley, said that making  disclosures only to select investors was “standard practice” in the industry. Legal experts say there a loophole in IPO rules such that it’s against the law for the underwriters to “publish” research on pre-IPO companies, but there’s no law preventing brokers in the firm advising key clients of new information in person or over the phone. (The law basically says underwriting firms can disseminate IPO information privately, but not publish it in the public purview.)