UPDATE 1-Facebook IPO shows galactic divide between investors

By Lauren Young

NEW YORK May 22 (Reuters) - It's no surprise to anyone that big investors get preferential treatment on Wall Street.

Investors expressed disappointment, skepticism and even shock on Tuesday after learning that an analyst at lead underwriter Morgan Stanley cut his Facebook revenue forecasts in the days before the company's initial public offering - information that apparently did not reach small investors before the stock went public and subsequently tumbled.

The divide between the research and retail arms of big Wall Street firms has always been deep. A former Morgan Stanley broker described the relationship as being "like Venus and Mars," an allusion to a best-selling book about the inherent differences between men and women.

As more details about Facebook's IPO emerge, investors have been finger-pointing, complaining and speculating about what's next for the company, Morgan Stanley and the Nasdaq, which had trouble executing trades on the day of Facebook began trading publicly.

Reuters reported late Monday that Morgan Stanley cautioned major clients about revised revenue expectations in the days leading up to the stock's market debut. Goldman Sachs and JPMorgan Chase, also underwriters of the IPO, cut their estimates for revenue.

Facebook shares tumbled 8.9 percent on Tuesday, closing at $31, or more than 18 below their offering price.

"Night and day the institutional clients get things that we don't get," said a Morgan Stanley broker who found out about the revised analyst forecast second-hand from media reports published Tuesday. "It's a big issue."

"This again shows the inherent conflicts of investment banking," added Mercer Bullard, founder and president of Fund Democracy. "If they selectively disclosed to some clients and not to others, they are clearly favoring those clients over the rest."

"The allegations, if true, are a matter of regulatory concern" to the Financial Industry Regulatory Authority and to the SEC, FINRA Chief Executive Rick Ketchum told Reuters.

The Securities and Exchange Commission and the Financial Industry Regulatory Authority on Tuesday called for a review of Facebook's IPO.

"This could have been a big win for everyone and could have led to a nice resurgence of tech related IPOs," said Knox Massey, managing partner at Keith-Massey Family Investments in Atlanta. "Instead, this experience may well have soured the market for a long time."

Some mom and pop investors are grumbling, too. "I should have gotten rid of it on Friday afternoon," said a financial services salesman in New York City who asked not to be named because he works with many firms involved in the deal. "I'm pissed that it fizzled  I'm pissed that Morgan Stanley took the wind out of the IPO's sails during the road show."

The salesman purchased Facebook stock through a Morgan Stanley adviser, receiving several thousand Facebook shares. "I should have been worried when I got six times the allocation I asked for," he said.

On the Reuters Facebook page, readers engaged in a discussion about potential class-action lawsuits for investors who lost money because their buy, sell or cancellation orders were mishandled. "Investors got SCREWED!" wrote Eric Arthur Bazaldua. "At least I still own my Farmville Farm," added Joseph C. Robles.

Not everyone thinks Facebook's prospects are dim, though. Richard Laermer, CEO of social network ThankBank and a buyer of Facebook stock at the IPO, said analysts and the financial industries are unfairly punishing Facebook for leading a new social networking bubble. "Brands that use Facebook to bring the population into understanding what the company stands for," Laermer says. "They are already seeing benefits and making money off Facebook."

Laermer says he's hanging tight. "There's no way I will ever lose money off a stock from a network with 900 million users. It's not physically possible," Laermer said.