Did Morgan Stanley Share Negative News before Facebook's Initial Public Offering with Institutional Investors?

The Financial Industry Regulatory Authority's chairman said on Tuesday that regulators plan to review allegations that Morgan Stanley shared negative news before Facebook's initial public offering with institutional investors.

"The allegations, if true, are a matter of regulatory concern" to FINRA and SEC, Ketchum told Reuters.

Ketchum made the remarks to Reuters in response to allegations that Morgan Stanley [MS  13.31    0.12  (+0.91%)   ], the lead underwriter on the deal, unexpectedly delivered some negative news to major clients in the run-up to Facebook's [FB  31.00    -3.03  (-8.9%)   ] $16 billion IPO: The bank's consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company.

Massachusetts Secretary of Commonwealth William Galvin has issued a subpoena to Morgan Stanley over the discussions with investors on Facebook.

It is unusual for analysts at lead underwriters to make such changes so close to the IPO, sources said. It is unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly.

"The Securities Division has put out a subpoena to Morgan Stanley in connection with the analyst's discussion with certain institutional investors about the revenue prospects for Facebook,'' a spokesman for Galvin's office said.

Morgan Stanley maintains that its handling of the Facebook IPO was in compliance with standard procedure.

"Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations," the brokerage said in a statement to CNBC.

"After Facebook released a revised S-1 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 publicized in the press at the time.  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," the statement said.

In a separate case, Nasdaq OMX Group has been sued by an investor who claimed the exchange operator was negligent in handling orders for Facebook shares following its IPO, causing losses for investors. 

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