Facebook Shame: Who’s to Blame?

Facebook (NASDAQ:FB) CFO David Ebersman reportedly decided less than three days before the social networking company’s IPO last week to boost the number of shares it would offer by 25 percent, a move investors are blaming for the stock’s poor performance since its debut.

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People familiar with the planning told the Wall Street Journal that Ebersman acted on advice from lead underwriter Morgan Stanley (NYSE:MS), which assured him there was plenty of demand, thin the last five years.

Securities and Exchange Commission Chairman Mary Schapiro said Tuesday that her agency will examine “issues” surrounding the initial public offering in an effort to ensure confidence in public markets. An agency spokesman declined to elaborate on just what “issues” were under review.

One such issue may be a technical glitch that Nasdaq OMX Group Inc. (NASDAQ:NDAQ) said hampered trading. Order cancellations interfered with the initial public offering process, according to Nasdaq. Had the exchange operator fully realized the extent of the technical problems, it said it would have delayed the IPO.

But no such luck, it seems. Nasdaq OMX will have to take comfort in being able to share the blame. News also broke Tuesday that Morgan Stanley and another underwriter, Goldman Sachs (NYSE:GS), told clients earlier this month they were reducing their earnings estimates for Facebook following a filing that showed the company’s ad-sales growth was lagging behind the expansion of its user base. Morgan Stanley retorted that it followed the same procedures for Facebook’s offering that it follows for all IPOs. The Financial Industry Regulatory Authority has pledged to probe whether those communications, first reported by Reuters, gave some investors an unfair advantage.

Ebersman is also on the hook for the failed debut, as he reportedly kept a close grip on every important decision on the stock offering rather than deferring to his bankers, as most companies do, according to people familiar with the matter. However, it’s not yet clear whether Facebook cares all that much about large investor losses. In terms of the company’s fundraising goals, the offering was a success — it raised $16 billion for Facebook and some early investors and valued the company at $104 billion. Furthermore, though shares are down in the short term, there’s no saying where they might end up, which means early investors who hold onto their stock may make up losses in the months ahead.

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