According to Business Insider, the Facebook IPO underwriters cut their estimates because a Facebook executive who knew the business was weak told them to. Essentially, the company pre-announced that its second quarter would fall short of analyst’ estimates, but the announcement was only sent to the underwriter analysts.
The information was later told to “sophisticated institutional investors” considering purchasing Facebook stock, but not to smaller investors.
Upon hearing of the estimate cut, some of the institutional investors were turned off of investing in Facebook stock at the purchase price they were initially considering.
Analysts cutting estimates is generally considered negative news for stocks, especially when the analysts cutting the estimates are close to the company.
The issue of some potential Facebook investors being told of the estimate cuts and others left in the dark is known as “selective dissemination” and is a violation of securities laws.
The U.S. Securities and Exchange Commission and FINRA have acknowledged what has happened and will potentially investigate the matter.