Facebook stock: Once hot IPO now a tale of lawsuits, glitches, and overreach

"Facebook flop."

"Facebook fiasco."

The stock offering that was supposed to bring exultation on Wall Street and in Silicon Valley is instead being viewed as a debacle for the firm and its investment backers.

Investors are suing financial firms tied to Facebook's initial public offering (IPO). Regulators are investigating potential improprieties. The head of the Nasdaq market has apologized for irregularities in transactions as the stock opened. And on Day 4 of its life as a publicly traded company, the social media trailblazer is seeing its shares trade far below their initial offering price.

The problems should be kept in perspective. IPOs sometimes trade down rather than up. Rocky start or not, Facebook is still a fast-growing social media giant valued today at more than $80 billion. Company founders and early investors have made big money as expected.

But the launch troubles represent a major letdown for the firm and the financial industry, given that this was perhaps the most closely watched American IPO since another Internet company, Google, went public in 2004.

Facebook is catching questions about whether it priced its share too high at the offering, and whether insiders essentially became greedy by boosting the amount of stock offered, just days before launch.

The IPO is already a target for legal action.

William Galvin, the Massachusetts secretary of the Commonwealth, has subpoenaed Morgan Stanley regarding its role as lead underwriter of the stock offering. Mr. Galvin said his office is investigating whether Morgan Stanley divulged to only some clients that one of its analysts had cut his revenue estimates for Facebook before the stock hit the market on Friday.

Meanwhile, the Wall Street Journal reported Wednesday that three investors have filed a lawsuit regarding that same disclosure issue, and that other lawsuits related to the Facebook IPO are in motion.

The Reuters news service reported Tuesday that Morgan Stanley analyst Scott Devitt cut his estimate for Facebook's revenue this year to $4.85 billion, down from more than $5 billion.

Morgan Stanley, in a statement, did not specifically address which clients might have been told about the reduced estimate. But the firm said that "a significant number" of analysts who track Facebook, including those from other firms underwriting the stock issue, had reduced revenue estimates to reflect publicly available information about the company.

Morgan Stanley also said that revised analyst views were taken into account in setting the stock offering price at $38 per share. The stock "FB" (Facebook's ticker symbol) was trading at about $32 per share on Wednesday.

The Securities and Exchange Commission, the lead regulator of US stock markets, is also looking into the IPO. The agency's chairman, Mary Schapiro, on Tuesday expressed confidence in the "integrity" of US financial markets, but said "there are issues that we need to look at specifically with respect to Facebook."

Beyond questions surrounding those who issued the IPO, the launch was unsettling for the stock market where Facebook is now listed. The Facebook IPO was much larger than the typical stock offering, and the Nasdaq market experienced major technical glitches Friday.

Trading in the stock was expected to start at 11 a.m. Friday, but it didn't open until 11:32 a.m. Some investors didn't learn for hours whether their orders went through.

The CEO of Nasdaq, Robert Greifeld, said over the weekend he was "humbly embarrassed." Nasdaq says it has modified its system for handling initial public offerings.

One lingering question, given the 16 percent decline in Facebook's share price since launch, is whether the company and underwriters did a poor job setting the offer price. The company announced its plans to set the price at $34 to $38 per share, and ended up at the high end of that range.

The Wall Street Journal reported Tuesday night that Facebook's chief financial officer, David Ebersman, decided shortly before the stock debut to raise the number of shares the company would offer by 25 percent. The Journal, citing people familiar with the planning of the stock offering, also reported that Morgan Stanley had assured Ebersman there was plenty of demand for the stock.

The share boost allowed some of the firm's insiders to sell a larger portion of their equity in the company than had been initially planned.

Pricing a new stock offering isn't easy, especially when the company involved has Facebook's blend of stellar growth and uncertain prospects. The uncertainty about the firm's revenues, for example, hinges in part on the way Facebook customers are increasingly using the social network on mobile devices rather than traditional home computers.

That could mean that, even though the firm has an enormous and fast-growing customer base, ad revenue grows more slowly than earlier projections had envisioned.

Material from The Associated Press was used in this story.