[ by Howard Haykin ]

The SEC has been probing Facebook Inc.’s (FB) 5/17/12 Initial Public Offering after its stock price plummeted.  While the investigation continues, anonymous sources report that the SEC hasn’t found evidence that the company - Facebook - withheld material information from investors.

Among the SEC's other IPO-related issues, is the question:  Whether retail investors were harmed by misleading information from brokers or selective disclosures to analysts by the company’s bankers regarding Facebook’s prospects for mobile customers. 

A Company Defense Against Civil Lawsuits.  Any conclusion by the SEC that Facebook made adequate disclosures of risks prior to its IPO would bolster the company’s defense against civil lawsuits filed by retail customers damaged by the sudden drop in the company’s initial $38 share price.  During a 2-1/2 month pre-IPO review of Facebook’s filings, the SEC pushed repeatedly for more disclosures, which were submitted.

"It’s unlikely the SEC will pursue an enforcement action against Facebook based on what they were discussing before the IPO. The SEC would have objected even more strenuously if the company had not complied."  During the "back-and-forth" process of the pre-IPO review, "Facebook was doing its best to respond to the SEC by disclosing enough information."
    -  Peter Henning, former SEC lawyer who teaches at Detroit's Wayne State Univ.

Meanwhile, Facebook retained Wilmer Cutler Pickering Hale & Dorr LLP to handle the SEC probe, according to two people with knowledge of the matter.  William McLucas, a former SEC enforcement director who heads up the firm’s securities practice, is managing the social-media company’s interactions with the commission, according to the people.
Kevin Callahan, an SEC spokesman, declined to comment on the probe, as did Facebook in a statement.
Handling the investor lawsuits for Facebook are Kirkland & Ellis LLP and Willkie Farr & Gallagher LLP, according to court filings. Facebook has said the more than 40 suits, which have been consolidated under one judge in federal court in New York, lack merit.

Back in September, SEC Chairman Mary Schapiro said her agency is conducting an "in-depth review of all the participants" in the IPO.  The initial focus was whether any material information was omitted from Facebook’s prospectus by the company, whether it shared bad news only with a select group, and whether sales people misrepresented demand for the social network stock to lure small investors. 

The SEC has heard no allegations of wrongdoing - so that was not a factor in conducting the probe.  The SEC will investigate whether any sales people associated with the underwriting group led by Morgan Stanley were telling wealthy investors to stay away, while encouraging retail investors to buy all the shares they could.  If that were true, it might constitute illegal misrepresentation.

Issues Concerning Nasdaq and Broker-Dealers. The Senate Banking Committee is also looking into the matter, and has held meetings “with a range of involved parties including Facebook, Nasdaq, Morgan Stanley and the SEC," said Sam Gilford, press secretary for the Senate committee, in an e-mailed statement.

The investor case is In Re: Facebook Inc. IPO Securities and Derivative Litigation, MDL 2389, U.S. Judicial Panel on Multidistrict Litigation (Washington).
                                                                                                         
For further details, go to:  [Bloomberg, 10/20/12].