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Facebook's Mark Zuckerberg sued over stock float

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Facebook CEO Mark Zuckerberg talks about Timeline during the f/8 conference

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Facebook founder and chief executive Mark Zuckerberg is being sued by the social network's shareholders over the company's problematic flotation on the US stock market.

Zuckerberg, Facebook and several banks led by Morgan Stanley stand accused of hiding the company's low growth potential ahead of the $16bn (£10bn) initial public offering (IPO) last week.

The lawsuit alleges that the defendants concealed "a severe and pronounced reduction" in Facebook's revenue generation forecasts during the IPO investors roadshow.

Separately, Morgan Stanley is also being investigated in the US over the way it acted as lead bank on Facebook's IPO, which was the third largest in history.

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The two top US financial regulators have said that Facebook's share launch should be reviewed, following the claims that Morgan Stanley selectively informed clients of a negative report by one of its analysts ahead of the Nasdaq debut.

Rick Ketchum, boss of the Financial Industry Regulatory Authority, which is the US body for policing the securities industry, said that the question is "a matter of regulatory concern" for his organization and the Securities and Exchange Commission (SEC).

Critics have accused Morgan Stanley of failing to warn smaller investors of the more negative outlook on Facebook's financial future, despite flagging up the issues and risks to several major investors.

This advance notice is said to have allowed the bigger investors to avoid the IPO or sell their stock immediately after it debuted last Friday at $38.

Facebook shares have fallen every day since then, and currently stand at just over $32.

Mark Zuckerberg

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Mary Schapiro, the head of the SEC, said: "There is a lot of reason to have confidence in our markets and the integrity of how they operate, but there are issues we need to look at specifically with regard to Facebook."

Morgan Stanley analyst Scott Devitt is said to have reduced his estimate for Facebook's revenue this year to $4.85bn (£3.1bn), down from more than $5bn, and also warned that the business faces various problems and issues.

He is understood to have said that the growth in revenues could be be hit by Facebook's current inability to generate sufficient advertising revenues from the increasing use of its service on mobile devices.

As lead underwriter, it is thought that Morgan Stanley would have received the biggest portion of the $176m in fees charged for the float, although 33 Wall Street banks, including JP Morgan and Goldman Sachs, were also involved in the listing.

Morgan Stanley insists that all of its procedures in the IPO were "in compliance with all applicable regulations".

"After Facebook released a revised S-1 [IPO] filing on May 9 providing additional guidance with respect to business trends, a copy of the amendment was forwarded to all of MS's institutional and retail investors and the amendment was widely publicised in the press at the time," the bank said in a statement.

"In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information. These revised views were taken into account in the pricing of the IPO."

Alongside controversy over the handling of the IPO, Facebook's blockbuster listing also resulted in technical glitches causing a delay to the start of trading on the Nasdaq. The exchange has set aside $13m as compensation to cover bad trades that resulted from the fault.

> Facebook hit with $15bn class action lawsuit over privacy

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