Taking the most heat is Morgan Stanley, said Mullaney.
The bank was lead underwriter among the 33 firms Facebook hired to manage the US$16 billion ($21 billion) sale of stock.
The bank decided with Facebook executives to boost the size and price days before the IPO, ignoring advice from some co-managers, said people with knowledge of the matter, who declined to be identified because the process was private.
Morgan Stanley talked with few of its fellow underwriters aside from JPMorgan Chase & Co and Goldman Sachs Group throughout the IPO, one person said.
"They overplayed the enthusiasm and probably just misread the atmosphere of the marketplace," said Keith Wirtz, chief investment officer at Fifth Third Asset Management in Cincinnati and who bought some stock in the IPO.
Facebook increased the number of shares being sold by 25 per cent last week to 421.2 million and raised its asking price to a range of US$34 to US$38 from US$28 to US$35.
Had Facebook kept the original terms, investors may have had a better shot at a first-day pop.
Instead, the stock was little changed in its debut because Morgan Stanley intervened to prevent it from falling below the IPO price.
The shares fell 8.9 per cent to US$31 at the close yesterday, after an 11 per cent drop the day before.
Just days before Facebook raised the size and price of its IPO, the company began telling analysts to lower their sales forecasts, people familiar with the matter said.
Morgan Stanley analysts were among those who cut their projections during the roadshow, said one person.
The move also followed a May 9 filing in which Facebook said advertising growth hasn't kept pace with the increase in users.
Some investors say they felt misled by the underwriters.
According to one London-based fund manager who asked not to be named, bankers indicated demand was so strong that he placed a bigger order than he thought he would get, leaving him with 40 per cent more Facebook shares than anticipated.
He sold most of that stock on the first day of trading.
The decision to boost the price range reflected the demand in the market, said a person involved in the process.
Goldman Sachs, Morgan Stanley and JPMorgan declined to comment.
Underwriters didn't say how great demand was.
Morgan Stanley and Facebook consider problems with Nasdaq OMX Group's computer systems among the reasons for the IPO's performance so far, according to people familiar with the matter.
Nasdaq's trading platform was overwhelmed by order cancellations and updates that made the stockmarket operator unable to finish the auction required to open trading.
The Securities and Exchange Commission said it will review the trading.
Nasdaq chief executive Robert Greifeld said about the glitch that the opening delay "had no apparent impact on the stock price", noting the share decline began after all brokers had received confirmation about their trades in the opening auction.
Robert Madden, a spokesman for Nasdaq OMX, declined to comment beyond Greifeld's statement. Nasdaq said it delivered all outstanding execution and cancellation messages to brokers for their IPO cross orders at 1.50pm. Facebook declined 5.9 per cent after that time.
Facebook chief executive Mark Zuckerberg and the early backers should be held accountable for the stock drop, said Francis Gaskins, president of researcher IPOdesktop.com in California.
Goldman Sachs, Accel Partners, Digital Sky Technologies and other existing holders boosted the number of IPO shares they offered in Facebook a day after the company increased its price range.
"It's a combination of Zuckerberg's ego for that US$100 billion market cap, and the shareholders selling who wanted an exit," Gaskins said.
"Somehow it just missed them that this was mispriced."
Larry Yu, a spokesman for California-based Facebook, declined to comment.
Facebook chief financial officer David Ebersman was the point person on the deal, while Zuckerberg and chief operating officer Sheryl Sandberg weighed in on big decisions throughout the process, people said.
Underwriters did accomplish part of what they set out to do - turn paper into cash for pre-IPO holders.
"It was successful for the liquidating owners, absolutely, because they got all that and then some," said Peter Sorrentino, a fund manager who helps oversee US$14.7 billion at Huntington Asset Advisors in Cincinnati.
INVESTOR SUES OVER IPO WOES
A Facebook investor is suing Nasdaq OMX Group claiming the stock exchange "badly mishandled" Facebook's initial public offering, delaying trading and failing to cancel orders when requested by customers.
Phillip Goldberg, a Maryland investor, said in a complaint filed in Manhattan federal court that he tried to both order and cancel requests for Facebook shares through an online Charles Schwab account the morning after the IPO.
He is seeking to represent a class of investors who lost money because their buy, sell or cancellation orders for Facebook stock were not properly processed, according to the filing.
"Orders placed by investors seeking to purchase Facebook shares during the first trading day often took hours to execute," Goldberg said in the complaint.
"In the meantime, the investors seeking to purchase those shares had no idea if their trades had executed, and, accordingly, had no idea if they owned Facebook shares at all," the filing said.
Goldberg, who claims Nasdaq acted negligently, is seeking unspecified damages.
- Bloomberg
