Federal regulators are very interested in this morning's report that Morgan Stanley and other underwriting banks shared negative info on Facebook with investors before last week's IPO.

The report from Alistair Barr of Reuters said that the three banks underwriting the IPO (Goldman Sachs and JPMorgan, with Morgan Stanley taking the lead) all downgraded their earnings forecasts for the company while it was still conducting its pre-IPO "roadshow." Business Insider's Henry Blodget, himself a former Merrill Lynch tech stock analyst of some repute, says he's never heard of such thing happening before. Even more troubling is that the banks appear to have passed that information along to only a handful of institutional investors, without sharing it on a wider basis. If true, that could possibly be a direct violation of securities law amounting to insider trading.

According to Reuters, The chairman of the Financial Industry Regulatory Authority said today that the allegations are very serious and will be reviewed by his outfit and likely the Securities and Exchange Commission as well. The idea that the underwriting banks received negative information about the company and kept it a (relative) secret could be devastating both to them and to Facebook, particularly since this stock offering was so closely watched and so widely shared with average retail investors. 

Combine this new with the ongoing questions about NASDAQ's failing trading systems and federal authorities are going to be spending a lot of time over the next several weeks looking very closely at Facebook and the financial companies that brought it to market. This story isn't going to be over anytime soon.

Update (7:00 a.m. Wed.): Morgan Stanley released a statement last night defending its handling of the IPO, stating that all its research and guidance was released to the public and its procedures are in compliance with all regulations.

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Dashiell Bennett