Shareholders suing Facebook, Zuckerberg

Facebook shareholders are suing Facebook Inc., CEO Mark Zuckerberg, and Facebook's lead underwriters for allegedly concealing a severe reduction in Facebook's revenue forecast from all but a few preferred investors.

The U.S. Securities and Exchange Commission (SEC) is also reviewing problems surrounding Facebook's May 18 initial public offering (IPO) and Massachusetts' securities division has subpoenaed Morgan Stanley over its handling of sensitive stock information.

The Facebook IPO has been marred by a number of incidents. Facebook shares may have been affected by technical trading glitches at the Nasdaq (at least one Facebook investor is suing Nasdaq for mistakes made during Facebook's Initial Public Offering) as well as lofty valuations and selective dissemination by underwriters, prompting a potential investigation into investor fraud.

"I think there is a lot of reason to have confidence in our markets ... but there are issues that we need to look at specifically with respect to Facebook," SEC Chairman Mary Schapiro told Reuters.

Shares and Prices Increase

On Tuesday, May 15, Facebook announced in its SEC filing that it would increase the price of its shares from $28-$35 to $34-$38 per share. On May 16, Facebook said that it would offer 25 percent more shares than previously planned when the IPO debuted on May 18, increasing the total number of shares for sale to 421 million.

Underwriters Reduce Revenue Forecasts

Meanwhile, in an unusual move, Facebook's lead underwriters - Morgan Stanley, JP Morgan, and Goldman Sachs - cut their earnings forecasts in the middle of the IPO roadshow and shortly before the shares were priced higher, according to news reports. The reduced forecasts were reportedly made in response to Facebook's May 9 SEC filing, in which the company expressed caution about revenue growth due to a shift to mobile use. Morgan Stanley, one of the lead underwriters, cut its estimate significantly for the current second quarter and also cut its full-year 2012 revenue forecast.

It is very unusual for lead underwriters to revise their estimates before an IPO. Typically, underwriters prefer to paint a positive picture for potential investors. When such revisions are made, the information should be made public. However, news of this cut might have only been shared with a few big investors. If this occurred, it would put a large group of people at an unfair disadvantage and could be a violation of federal securities law.

Nasdaq Mishandles IPO

Nasdaq is also under scrutiny for allegedly mishandling the IPO on Friday, May 18, prompting demands from brokers and traders to make up for their losses. An investor has already sued Nasdaq and is seeking class-action status, claiming Nasdaq was negligent in handling Facebook orders, resulting in losses for investors. One hedge fund manager is alleging that Nasdaq knew its systems were broken before the IPO and cost traders hundreds of millions when they did not receive confirmation of their trades.

The Nasdaq Chief Executive has admitted to mistakes made during the IPO and reports indicate that a number of orders may have remained unexecuted at the end of the day on Friday. Nasdaq may have exacerbated the problem the following Monday by letting traders submit a form stating what price they thought they sold the stock at.

The Facebook IPO performed far below expectations. Shares barely stayed above the $38 price on the first day, and plunged on Monday, May 21, falling by 12 percent.