Facebook's shares fell sharply again on Tuesday and two top U.S. financial regulators called for a review of the circumstances surrounding its troubled initial public offering last week.
The separate calls for review, by Securities and Exchange Commission Chairman Mary Schapiro and FINRA Chairman Rick Ketchum, added pressure on the company, its underwriters and the Nasdaq, all of which have taken blame for the stock's harried opening and subsequent sharp decline.
After Friday's nearly flat close and Monday's 11 per cent plunge, Facebook shares were down 5.9 per cent at $32.01 in mid-afternoon trading. At that price the company has shed more than $16-billion in market capitalization from its $38-per-share offering price last week.
Volume was again heavy, with 74 million shares changing hands. That followed turnover of 168 million shares Monday and 581 million on IPO day.
With Facebook shares all but impossible to sell short, investors have sought out almost any related vehicle to bet against the social network. Over the past three trading days, prices plunged on two closed-end funds that owned pre-IPO shares. Firsthand Technology Value Fund and GSV Capital Corp. both dropped more than 25 per cent even though their Facebook holdings make up only a small fraction of assets.
"Until investors can actually short Facebook, they have to keep shorting other things that can give them some sort of proxy for Facebook," said Thomas Vandeventer, manager of the Tocqueville Opportunity Fund, which owns shares of both the battered closed-end funds.
"There was a quick rush to exit yesterday, and when it broke the deal price it became self-fulfilling that there was going to (be) additional pressure," said Michael James, a senior trader at regional investment bank Wedbush Morgan in Los Angeles.
Investors were still shaking their heads over the botched opening trading of Facebook when Reuters reported late Monday that the consumer Internet analyst at lead underwriter Morgan Stanley cut his revenue forecasts for Facebook in the days before the offering.
JPMorgan Chase and Goldman Sachs, which were also underwriters on the deal, each revised its estimates during the road show as well, according to sources familiar with the situation.
"The allegations, if true, are a matter of regulatory concern" to the Financial Industry Regulatory Authority and to the SEC, FINRA's Mr. Ketchum told Reuters.
One mutual fund source said they had never, in a decade of experience, seen an underwriter cut a company's outlook during the road show prior to an offering.
The SEC's Ms. Schapiro said investors should be confident in investing, but she conceded there were questions to answer.
"I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook," she told reporters as she exited a Senate Banking Committee hearing.
Brokers who over-ordered shares in the expectation that supply would be limited continued to complain they received too much stock to handle and were left in the dark about forecast changes.
One Morgan Stanley Smith Barney adviser said that the fact that institutional investors received information that retail investors did not is "a huge issue for the entire industry.
"Night and day the institutional clients get things that we don't get. It's a big issue," the adviser said, adding there was surprise within the brokerage that Morgan Stanley, as lead underwriter, had not done more to support the share price.
As bad as the declines have been, though, a view persists that the stock remains overvalued.
Monday's closing price of $34.03 implied a 24 per cent annual growth rate for Facebook earnings over the next 10 years – a rate that would rank above 90 per cent of the companies in that industry.
Thomson Reuters Starmine, meanwhile, more conservatively estimates a 10.8 per cent annual growth rate – almost exactly the mean for the technology sector – which would value the stock at $9.59 a share, a 72 per cent discount to its IPO price.
Similarly, the company's price-to-earnings ratio remains lofty, even after the selloff. The $34.03 price implies a forward P/E of 59, compared with Google's 13.3 forward price-to-earnings ratio (for a similar rate of growth).
Investors said the challenge for the young company is to prove it can grow at a rate that justifies its lofty valuation and demonstrates its maturity.
"Wall Street is a severe taskmaster and they're going to want to see quarterly results, then guidance, then subsequently they're going to want to see that guidance beaten, and then the guidance raised," David Rolfe, chief investment officer of Wedgewood Partners, said on Monday evening.
Besides the pressure on Facebook, there is also an intense focus on Nasdaq , which has shouldered much of the blame for the trading failures. The exchange has set aside money to compensate customers, but some on Wall Street are warning its ability to snag future big IPOs is at risk.
But Nasdaq shareholders gave the company a pass Tuesday – the exchange operator's annual meeting only lasted a few minutes and top executives did not get any questions at all on what went wrong with Facebook or what they were doing to correct it.
Barry Ritholtz, a widely followed financial blogger and the chief market strategist at Fusion IQ in New York, took all sides – Facebook, Morgan Stanley and Nasdaq – to task in the sharpest terms on his blog Tuesday.
"Thus, what we see are a series of bad decisions made by Facebook's executives going back many years. The insiders got greedy, too clever by half, in how they used secondary markets. They picked a bad banker and an awful exchange," Mr. Ritholtz said.