Massachusetts Regulator Subpoenaed Facebook Banks

Securities division looks at role of underwriters, securities analysts in IPO.

Massachusetts Secretary of the Commonwealth William Galvin subpoenaed Citigroup Inc. along with Facebook Inc.’s lead underwriters Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co. in connection with the decline of Facebook’s share price following its initial public offering in May, his office said.

Citigroup was fined $2 million after a junior analyst improperly disclosed confidential information before Facebook Inc.’s IPO, Galvin’s office said yesterday.

As a part of Facebook’s underwriting syndicate, Citigroup Global Markets was barred from disseminating research until 40 days after the stock offering, Galvin said yesterday in a statement. About two weeks before the IPO, a junior analyst at the unit e-mailed two employees at seeking feedback on a Facebook document that contained a senior analyst’s view of investment risks and revenue estimates, Galvin said.

The Citigroup e-mails are part of a larger trove of documents that Galvin obtained by subpoenaing the bank along with the lead underwriters, Galvin’s office said. The probe began in May as Facebook’s stock slid amid lawsuits alleging that retail investors weren’t told negative news about Facebook’s prospects.

Galvin’s Securities Division is focusing on the roles of investment banks and securities analysts, and issues of disclosure, his office said.

The Citigroup penalty “should serve as a warning to the industry as a whole,” Galvin said in the statement about Citigroup. “It is essential in these times of rapid and diffuse means of communications that financial institutions be vigilant to ensure that the rules on IPOs are observed by all their personnel.”

The junior analyst, whose name wasn’t released, was fired by Citigroup on Sept. 27, Galvin said. Yesterday, Citigroup fired Mark Mahaney, a senior technology analyst, according to a person with direct knowledge of the matter, as it settled Galvin’s claim that a junior analyst disclosed confidential information before Facebook’s IPO.

The exit of Mahaney, 46, resulted from earlier actions uncovered in the course of the Facebook probe, according to a person familiar with the matter. Mahaney, who was based in San Francisco, declined to comment when reached yesterday by mobile phone.


Not at Bank

As of Friday, Mahaney was no longer at Citigroup, said the bank’s spokeswoman, Sophia Stewart. “We take our internal policies and procedures very seriously and have taken the appropriate actions,” she said in an e-mail.

JPMorgan spokesman Joseph Evangelisti declined to comment on Galvin’s probe, as did Mary Claire Delaney, a Morgan Stanley spokeswoman, and Leslie Shribman, a Goldman Sachs spokeswoman.

Galvin has said separately that he has subpoenaed Morgan Stanley, Facebook’s primary underwriter, to learn more about talks between Scott Devitt, one of the firm’s research analysts, and its institutional investors about Facebook’s revenue.

A drop in Facebook stock after the May 17 offering fueled shareholder complaints, regulatory probes and more than 40 lawsuits, with some investors claiming the social-network company’s managers failed to disclose revised forecasts before the IPO, and others blaming underwriters or analysts.

Facebook has said the lawsuits lack merit.

The U.S. Securities and Exchange Commission also is looking at the IPO, said a person familiar with the probe who asked not to be identified because the probe is confidential. The top securities regulator wants to know whether retail investors were harmed by misleading information from brokers or selective disclosures to analysts by the Facebook’s bankers regarding Facebook’s prospects for mobile customers, the person said.

The SEC’s focus is on whether Facebook information was leaked selectively to privileged investors, not on whether analysts were improperly disclosing their own research, as in the Citigroup censure, the person said. If sales people attached to the underwriting group led by Morgan Stanley were telling wealthy investors to stay away, while encouraging retail investors to buy all the shares they could, that might constitute illegal misrepresentation, the person said.


Before Offering

Just days before the offering, Facebook officials privately told securities-firm analysts to lower earnings and profit estimates -- largely on the dearth of revenue from mobile users. A company disclosure on May 9 warned investors that users were growing faster than advertising delivered to users. The warning was widely reported by the media, so information was publicly available on Facebook’s reduced expectations, even if retail investors didn’t read it.

The Senate Banking Committee is also looking into the social network’s offering, and has held meetings “with a range of involved parties including Facebook, Nasdaq, Morgan Stanley and the SEC,” said Sam Gilford, press secretary for the Senate committee, in an e-mailed statement.

Citigroup’s e-mail exchanges were provided to Galvin’s office on Sept. 14 in response to a subpoena, the watchdog said.

Galvin faulted the Citigroup subsidiary for failing to supervise its analysts. The firm settled, admitted to a statement of facts and pledged to abide by state securities laws, he said.


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