Facebook IPO Furor Heats up as Feds Probe Insider Trading

Massachusetts subpoenas Morgan Stanley for Facebook

The Federal Government is investigating allegations that Facebook's Wall Street investment banks tipped off top clients about the company's financial prospects days before their IPO filing.

Analysts reportedly receiving briefings from Facebook executives and proceeded to lower their financial forecasts for big clients. Some of those clients then scaled back their plans to buy stock during the same time that the banks were raising the IPO price.

The revelations called into question the underwriters of Facebook and their ethics as they may have released certain information that gave certain clients an unfair advantage.

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The controversy has already led to a subpoena by the state of Massachusetts on Morgan Stanley, and the worst 3-day performing start of any IPO valued over $1 billion in the last five years.

Facebook shares closed 8.9 percent lower at $31, following an 11 percent plunge on Monday. At that price the company has shed more than $19 billion in market capitalization from its $38-per-share offering price last week.

The Facebook controversy is another black mark on Wall Street as they try to shed their image of corporate greed and taking advantage of the average investor.

“The FB IPO selective disclosure stories just keep getting worse,” Sallie Krawcheck, former head of wealth management at Bank of America, wrote in a Twitter message. “If true, an absolute outrage. Come on, Wall St!!”

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