[ by Howard Haykin ] Is it true that a Morgan Stanley internet analyst was crunching numbers right up until the start of Facebook's IPO, on the hunch that his prior earnings estimates were overstated?  And is it true that the completed analysis confirmed his suspicions?  And is it further true that this analyst took it upon himself to inform a select number of Morgan Stanley's major institutional customers of his revelations? Thank goodness FINRA is on the case - that, according to Chairman Rick Ketchum.  The news noisy rumors have been circulating the Street and rustled Mr. Ketchum out of his Washington, D.C. offices.  [Go to C-I's 5/22 WWW story, "Facebook Underwriter Had ..."] Yet, the news, we believe, is unsubstantiated and, for all we know, it may, in fact, prove to be a rumor.  On the other hand, how can it true - who's ever heard of an underwriter's analyst who knock lowers estimates on the firm's client?  Also, how likely is it that an experienced analyst would violate Reg FD on the biggest IPO in creation?  It really does seem quite surreal and unbelievable. The Center of the Storm. MS internet analyst Scott Devitt reportedly reduced his revenue forecasts for Facebook just ahead of ("in the runup to") Facebook's $16 billion IPO.  T unexpectedly negative new then reportedly was delivered to major clients. Needless to say, the sudden cautionary analysis - so very close to the huge IPO, and while an investor roadshow was underway - was a big shock to some, said 2 investors who were advised of the revised forecast, according to Reuters. They surmise it may have contributed to the weak performance of Facebook shares, which sank on Monday - their 2nd day of trading - leaving shares 10% below the IPO price. The IPO went off at $38 per share, which valued Facebook at $104 billion. Why the Change, Why Then? According to Reuters, the change in Morgan Stanley's estimates came on the heels of Facebook's filing of an amended prospectus with the SEC, in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices.  Mobile advertising to date is less lucrative than advertising on a desktop.

"This was done during the roadshow — I've never seen that before in 10 years," said someone from a mutual fund firm, who allegedly was among those called by Morgan Stanley.

JPMorgan Chase and Goldman Sachs Group, which also were major underwriters on the IPO, also revised their estimates in response to Facebook's 5/9/12 SEC filing, according to sources familiar with the situation. Morgan Stanley declined to comment and Devitt did not return a phone message seeking comment. JPMorgan and Goldman both declined to comment. Typical Protocol. An underwriter wants to paint as positive a picture as possible for prospective investors, though the securities laws and regulations have been revised to keep firm analysts separate from firm bankers and salespeople - in physical and mental terms. Following his calculations, people familiar with the revised Morgan Stanley projections say Devitt followed up by cutting his revenue estimates for the Q2 of 2012, as well as for the full 2012 fiscal year.  Devitt's precise estimates could not be immediately verified.  "That deceleration freaked a lot of people out," said one of the investors. Scott Sweet, senior managing partner at the research firm IPO Boutique, said he was also aware of the reduced estimates.  "They definitely lowered their numbers and there was some concern about that," he said. "My biggest hedge fund client told me they lowered their numbers right around mid-roadshow."  That client, he said, still bought the issue but "flipped his IPO allocation and went short on the first day."

It's said that the lower revenue projection came shortly before the IPO was priced at $38 a share, the high end of an already upwardly revised projected range of $34 to $38, and before Facebook increased the number of shares being sold by 25%.

As it turned out, the much-anticipated IPO performed far below expectations, with the shares barely staying above the $38 offer price on their Friday debut before plunging on Monday and Tuesday. Companies do not make their own financial forecasts prior to an IPO, and underwriters are generally barred from issuing recommendations on the stock until 40 days after it begins trading. Analysts often rely on guidance from the company in building their forecasts, but companies doing IPOs are not permitted to give out material information that is not available to all investors. Institutions and major clients generally enjoy quick access to investment bank research, while retail clients in many cases only get it later. It is unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly. The firm declined to comment when asked who was told about the research. "It's very rare to cut forecasts in the middle of the IPO process," said an official with a hedge fund firm who received a call from Morgan Stanley about the revision. For further details, go to: [Reuters, via CNBC, 5/22/12].