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Investment firms warned of Facebook woes before IPO, report says

According to a new report, an investment firm named Capital Research & Management was warned of Facebook's dour revenue forecast, allowing it to cut back on the shares it bought in the IPO.

Don Reisinger
Former CNET contributor Don Reisinger is a technology columnist who has covered everything from HDTVs to computers to Flowbee Haircut Systems. Besides his work with CNET, Don's work has been featured in a variety of other publications including PC World and a host of Ziff-Davis publications.
Don Reisinger
2 min read

As more details emerge on the behind-the-scenes events surrounding Facebook's initial public offering, the more upsetting the revelations might become to individual investors.

Just before Facebook went public, a large investment firm named Capital Research & Management indicated to the social network's underwriters that it wanted to take a significant investment in the company. However, according to the Wall Street Journal, citing sources, Capital Research was warned by one of Facebook's underwriters about the social network's declining revenue forecast, leading the investment firm to buy far fewer shares than initially anticipated. Some of the firm's fund managers didn't buy any Facebook shares because of the data received, according to the Journal's sources.

One of the Journal's sources said a Capital Research manager on the eve of the IPO told a banker at Morgan Stanley, Facebook's lead underwriter, that the $38 IPO price was "ridiculous," based on the information they had at the time.

The Journal's revelations come just a day after Facebook, its CEO Mark Zuckerberg, and a host of banks involved in the IPO were sued in the U.S. District Court in Manhattan. The lawsuit, which was brought to the court by Facebook shareholders, accuses the defendants of failing to disclose "a severe and pronounced reduction" in forecasts of Facebook's revenue growth. The plaintiffs were especially concerned that information was only being handed out to a small group of preferred investors, and not individual investors.

Still, it's not clear if the investors will be able to win their case. Securities firms have always provided major investors with information not available to individuals -- and they're allowed to do so. In fact, some firms told the Wall Street Journal that clients pay for the kind of data not available to individuals, and it's customary for it to change hands around an IPO.

Inevitably, though, the Facebook IPO woes come back to fairness. Large investors reportedly had more data available to them than individual investors, helping them preserve their investments. And those who bought a few shares here and there when Facebook was trading over $40 are now left to wonder if they'll be able to recoup their cash outlay.

Looking ahead, far more fallout from this mess is expected to pop up. There's now talk of Facebook looking to leave the Nasdaq and head over to the New York Stock Exchange. And with a lawsuit looming large, there's no telling what else might be revealed.

CNET has contacted Facebook for comment on the Wall Street Journal report. We will update this story when we have more information.