Facebook's initial public offering has triggered allegations that the social network and banks led by Morgan Stanley selectively disclosed crucial information to investors.
Securities law experts say it's not clear the firms did anything wrong.
At issue is whether Facebook gave non-public, material information to analysts that was then shared with select investors in the form of lower earnings projections.
The answer lies in the evidence uncovered and the interpretation of Regulation FD, a US Securities Exchange and Commission rule that requires public disclosure of important information.
Facebook amended its IPO filing on May 9, about a week before the US$16 billion ($21 billion) sale, to say growth in advertising had failed to keep up with user gains. It then contacted more than 20 analysts, including those at underwriters Morgan Stanley, Goldman Sachs and JPMorgan, to guide them towards the lower end of its second-quarter sales estimate.
A day after that filing, the analysts called up some investor clients to communicate their revised estimates for sales and profit, said people with knowledge of the process.
Facebook's stock has dropped 16 per cent since the initial share sale, spurring shareholder suits from New York to California. They allege that Facebook and its underwriters misled investors by failing to disclose the figures to a wider audience.
Information is material if it would probably affect a company's share price, if known. The company didn't give the analysts any materially different information than the updated prospectus, said a person close to the company.
It is standard for a company to provide guidance to analysts ahead of an offering. Larry Yu, a spokesman for Facebook, declined to comment.
Any lawsuit will have to prove that the information Facebook and its bankers gave investors was material, or important, said Jeffrey Manns, professor of banking and securities law at George Washington University.
"It might have been better for Facebook had they made more specific disclosures and made them publicly, because rather than a story of public outrage and disgust, the expectations might have been a bit more tempered in a healthy way," Manns said.
Morgan Stanley analysts cut their 2012 profit estimate for Facebook to US48c a share from US51c, said two of the people. They also cut their 2013 profit projection to US83c a share from US88c, they said. Investors received the new figures by phone as underwriters weren't permitted to publish anything about Facebook during the marketing period.
While the communication of the estimates may have been selective disclosure, investors may only have a case if they can prove the filing omitted crucial information, said John Coffee, a Columbia University law professor.
"This is a good example of the shortfall of Regulation FD, which should embarrass the SEC."
While analysts cut their estimates, Facebook and its underwriters raised the price range and the number of shares on offer. Facebook sold shares at US$38 apiece in its IPO. The stock hovered close to that price in its trading debut as Morgan Stanley bought the stock to stabilise it, then fell as low as US$30.94 on May 22.
"If it turns out that the vast majority of investors who ran for the exits right off the bat, ran for the exits because they knew something, that's clearly material," said lawyer Dominic Auld.