Federal and State Regulators Stepping Up Facebook Investigation

Comment from thebrackpipe:  Analysts running afoul?  Impossible ;  )  “Investors in the highly anticipated offering have lost billions of dollars as Facebook’s shares have tumbled, and lawmakers and others have questioned whether small investors were unfairly kept in the dark amid reports that the underwriting firms selectively passed on financial warnings from the social-media company to favored clients, including large institutions.”  Oh, and by the way, I dare you to guess what banks were involved –  Morgan Stanley, JP Morgan and Goldman Sachs.

Article below from the WSJ.com:

Citigroup Inc. fired Mark Mahaney, an Internet analyst whose deep ties to Silicon Valley start-ups helped the bank land lucrative jobs managing hot initial public offerings, after he and another analyst allegedly ran afoul of rules covering disclosures to the media about two companies he covered, Facebook and Google.

The New York company dismissed Mr. Mahaney for allegedly trying in April to cover up a violation of the bank’s protocol on responding to media requests, according to a person familiar with the matter. Massachusetts’ securities regulator on Friday fined the company $2 million for failing to supervise Mr. Mahaney and a junior analyst he oversaw.

Some at Citigroup were shaken by Mr. Mahaney’s dismissal, which came just a week after the board of the nation’s third-largest bank by assets forced out Vikram Pandit as chief executive and replaced him with Mike Corbat. The decision to fire Mr. Mahaney was approved by senior managers at the firm, but didn’t go up to board level, according to a person familiar with matter. The move isn’t directly linked to last week’s management change, the person added.

Mr. Mahaney, based in San Francisco, produced research that was considered influential by investors, and some technology companies sought Citi’s banking services because of his star power. Citi is currently ranked seventh by data-tracker Dealogic by U.S.-listed Internet IPOs underwritten so far in 2012, based on deal volume.

The action comes as federal and state regulators are stepping up their investigation into a number of the banks that underwrote May’s Facebook IPO, according to people familiar with the probes. Investors in the highly anticipated offering have lost billions of dollars as Facebook’s shares have tumbled, and lawmakers and others have questioned whether small investors were unfairly kept in the dark amid reports that the underwriting firms selectively passed on financial warnings from the social-media company to favored clients, including large institutions.

The Securities and Exchange Commission is looking into the Facebook IPO, according to people familiar with the probe. Investigators at the agency are scrutinizing the information given by the company to the banks and by the banks to their clients, as well as the technical glitches that marred the stock’s debut, the people said. The underwriting firms didn’t necessarily break any regulations, even if they may have left some small investors at a disadvantage.

The Financial Industry Regulatory Authority, a Wall Street self-regulator, is investigating whether certain of the underwriting firms breached securities laws in their communications with clients, the media or others as related to the Facebook IPO, the people said. Finra has sent subpoenas seeking information on those communications to Citigroup and other banks, according to people familiar with the matter.

Massachusetts’ top financial regulator, Secretary of the Commonwealth William Galvin, also is looking at a number of the underwriting firms in the Facebook IPO, in addition to its probe into Citi and its already disclosed inquiry into lead underwriter Morgan Stanley.  Mr. Galvin’s office has also sent subpoenas to the other two lead underwriters, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., the person said.

Meanwhile, Citi said it would discontinue publishing research about some of the about 30 companies Mr. Mahaney followed and transfer coverage for some of those companies to senior analyst Neil Doshi. In addition to Facebook and Google, Mr. Mahaney covered Amazon.com Inc., Groupon Inc. and Yahoo Inc.

The junior analyst in the case, identified by people close to the matter as Eric Jacobs, was fired on Sept. 27, Massachusetts said in the consent order on the Citigroup case.

Citigroup Global Markets Inc., the bank’s investment-banking arm, admitted to the regulator’s statement of facts and agreed to permanently cease and desist from violating state securities laws.

A Citigroup spokeswoman said, “We are pleased to have this matter resolved. We take our internal policies and procedures very seriously and have taken the appropriate actions.”

The consent order said that on April 30, the senior analyst—identified by people familiar with the case as Mr. Mahaney—provided unpublished information about revenue estimates for Google’s YouTube unit to a reporter for Capital, a French business magazine.

He then allegedly told a communications employee at Citigroup that he hadn’t responded to the magazine reporter’s questions. The employee told the reporter the analyst wasn’t available—prompting the reporter to say he had already responded, the state said in the consent order.

When told that an interview request would have to be approved, the analyst urged a research-department employee to submit approval for an interview the next day, a Tuesday, the order said.

When told that the request for a Monday post-interview approval had already been submitted, Massachusetts’ complaint alleges, the analyst responded, “This could get me in trouble. Shoot.”

The consent order said that in May, the junior analyst Mr. Jacobs shared nonpublic information about Citigroup’s view of Facebook investment risks and revenue estimates with employees of Techcrunch.com, an online media company, at a time when there was supposed to be no communication by underwriting banks with the public on the subject.

The Techcrunch employees were identified by people familiar with the case as Kim-Mai Cutler and Josh Constine. Ms. Cutler declined to comment. Mr. Constine did not immediately respond to a request for comment.

According to the consent order, the junior analyst emailed two TechCrunch reporters, saying that “my boss would eat me alive,” referring to Mr. Mahaney, if it was known he had disclosed the bank’s Facebook analysis.

Mr. Mahaney later initiated coverage of Facebook with a “hold” rating, in contrast to the “buy” ratings placed by analysts at the deal’s lead underwriters, Morgan Stanley, Goldman Sachs, and J.P. Morgan. His initial price target, $35, was among the lowest of analysts associated with underwriters of the IPO.

Facebook shares priced at $38 in May before briefly rising and then staging a long decline. Facebook fell 62 cents, or 2.7%, to $21.94 in Nasdaq trading Friday.

Mr. Mahaney was first brought to New York this past Wednesday to discuss his emails with the French reporter with Jonathan Rosenzweig, Citigroup’s director of research, according to people familiar with the discussions. He was informed he was fired Friday morning, after he had flown back to San Francisco.

People familiar with the matter said that Mr. Mahaney didn’t dispute the emails that led to his termination, and that he acknowledged making a mistake. Mr. Mahaney didn’t have knowledge of his junior analyst’s disclosures with regard to Facebook, and wasn’t involved at all in that matter, these people said.

As news spread of Mr. Mahaney’s departure, other analysts in the industry said they would keep a closer eye on what they said.

This case “absolutely” will make it more difficult for journalists to obtain confidential information from analysts, said Kelly McBride, a senior faculty member at the Poynter Institute, a nonprofit school for journalists.

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