House, Senate lawmakers launch inquiries into Facebook's IPO debacle

House, Senate lawmakers launch inquiries into Facebook's IPO debacle

It has taken just six days for the razzle-dazzle of Facebook’s $104 billion market debut to turn into a nightmare of congressional inquiries. 

Republican and Democratic lawmakers on Wednesday began to look into the debacle of what was supposed to be the social networking company’s crowning achievement. 

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Lawmakers want to know whether institutional investors got a sneak peek at an updated analysis, written just before the initial public offering, that gave a more pessimistic assessment of Facebook’s future revenues. It’s that analysis that might have caused the hotly anticipated stock to tumble out of the gate, losing more than a quarter of its value in its first two days on the open market.

“Effective capital markets require transparency and accountability, not one set of rules for insiders and another for the rest of us,” said Sen. Sherrod BrownSherrod Campbell BrownFacebook's new cryptocurrency raises red flags for critics Facebook's new cryptocurrency raises red flags for critics Hillicon Valley: Senate sets hearing on Facebook's cryptocurrency plans | FTC reportedly investigating YouTube over children's privacy | GOP senator riles tech with bill targeting liability shield | FAA pushed to approve drone deliveries MORE (D-Ohio), who heads the Senate Banking Committee’s subcommittee on Financial Institutions and Consumer Protection and called on the Securities and Exchange Commission (SEC) to investigate. 

Both the House Financial Services Committee and Senate Banking Committee say they will look into the issue, with lawmakers in both parties raising questions about what happened. 

Sen. Chuck GrassleyCharles (Chuck) Ernest GrassleyOvernight Health Care: Trump officials defend changes to family planning program | Senators unveil bipartisan package on health costs | Democrats pass T spending bill with HHS funds Overnight Health Care: Trump officials defend changes to family planning program | Senators unveil bipartisan package on health costs | Democrats pass T spending bill with HHS funds Grassley announces opposition to key Trump proposal to lower drug prices MORE (R-Iowa) said it “caught his ear” when he heard about reports of the sneak peek, and said it was up to regulators to get to the bottom of it.

“If that’s true, that’s just one more bit of evidence that the integrity of the research is being compromised,” he said. “It’s supposed to be for everybody, not for traders who are going to benefit from it before anybody else knows about it.”

The controversy is a second punch for the investment-bank industry in the past two weeks. Lawmakers are also scrutinizing botched trades at JPMorgan Chase that have led to at least $2 billion in losses for the bank, which severely tarnished its reputation in Washington. K Street lobbyists for the banking industry worry the errors could lead regulatory agencies writing rules under the Dodd-Frank financial reform bill to tighten the screws. 

For Facebook, the IPO has made for an embarrassing coming-out party for one of Silicon Valley’s most promising companies. While the company’s stock did rise Wednesday to $32 per share, it remains well under its initial opening price of $38.

Morgan Stanley, the IPO’s chief underwriter, is under scrutiny over whether it released an analysis reducing revenue forecasts for the company to select clients just before the IPO. Large institutional investors might have tempered their enthusiasm for the stock after learning of the downgrade, but the information did not make it out to retail investors before the stock went public.

Scorned investors filed a proposed class-action suit Wednesday in federal court against Facebook, Morgan Stanley, Goldman Sachs and other underwriters of the IPO. The plaintiffs argued investors had lost more than $2.5 billion since the company went public and were not informed of the trim in revenue expectations.

The state of Massachusetts is also scrutinizing Morgan Stanley, issuing a subpoena for documents tied to the IPO. The bank has defended its actions, saying it followed the same procedures with Facebook that it has with other IPOs.

The stock exchange listing the company’s stock has also come under scrutiny. The Nasdaq OMX Group has been sued by investors after the exchange struggled to process orders in the first minutes of public trading, which was delayed roughly half an hour. Media reports indicated Wednesday that Facebook was even considering jumping to the New York Stock Exchange, although a spokesman for that exchange denied those reports, according to Bloomberg.

Senate Banking Committee Chairman Tim JohnsonTimothy (Tim) Peter JohnsonSeveral hurt when truck runs into minimum wage protesters in Michigan Senate GOP rejects Trump’s call to go big on gun legislation Court ruling could be game changer for Dems in Nevada MORE (D-S.D.) said his staff is holding bipartisan staff briefings with Facebook, regulators and other stakeholders. “Once these briefings have concluded and the staff reports back to me, I will determine if a Senate Banking Committee hearing is necessary,” he said. 

A spokeswoman for the House Financial Services Committee said its staff was being similarly briefed. While no hearing has been scheduled on the IPO, she added that the topic was likely to be raised at other hearings.

Overall, the Capitol Hill response to Facebook’s woes has been muted compared to the reaction to losses at JPMorgan. 

Sen. Bernie SandersBernie SandersSanders denies tweet about corporate Democrats was dig at Warren Sanders denies tweet about corporate Democrats was dig at Warren Democrats asked to create ideal candidate to beat Trump pick white man: poll MORE (I-Vt.) used the JPMorgan mistake to push for the removal of its head, Jamie Dimon, from the board of the Federal Reserve Bank of New York and to call for the nation’s biggest banks to be broken up.

On Wednesday, he said he had yet to study the issues surrounding Facebook.

Similarly, Sen. Bob CorkerRobert (Bob) Phillips CorkerPress: How 'Nervous Nancy' trumped Trump Press: How 'Nervous Nancy' trumped Trump Amash gets standing ovation at first town hall after calling for Trump's impeachment MORE (R-Tenn.) was calling for hearings on JPMorgan’s losses just hours after they were announced. But when it comes to Facebook, he said he has been “more of a bystander.”

For him, the key difference is that JPMorgan’s struggles will affect the writing of Dodd-Frank’s regulatory rules. 

“I’ve obviously been more focused on the JPMorgan issue. Not because of JPMorgan, but because we have regulation that it’s going to affect,” he told The Hill. 

“I think it’s really good for us to understand things like [Facebook], but I don’t really personally have any opinion,” he added.

While Grassley is interested in the matter, he said that regulators should be able to “deal with it” and that more legislating from Congress is not necessary.

SEC Chairwoman Mary Schapiro said Tuesday that regulators were looking into “issues” surrounding the stock offering, but declined to elaborate further.

“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.

— Brendan Sasso contributed.