Today: The investigation into leaks before Facebook's IPO leads to fine and firings, while man who brought lawsuit is charged with fraud. Also: Apple (AAPL) falls below $600 for first time in months after earnings report, but bounces back; and Netflix's (NFLX) rise on buyout rumors helps indexes break even.
Citi fined for Facebook leak; claim against Zuckerberg leads to fraud charge
Dual distractions for Facebook showed hints of an end Friday, as investigations into leaks of financial forecasts from underwriting banks before the social network's record-breaking initial public offering and a lawsuit by a man claiming half-ownership of the Menlo Park company made major advances.
In the leaks investigation, Massachusetts Secretary of the Commonwealth William Galvin levied a $2 million fine on Citigroup after emails showed that a junior analyst stationed in San Francisco leaked private financial information on Facebook to friends at the technology blog TechCrunch.
The unnamed analyst graduated from Stanford with a TechCrunch writer, and follow-up emails showed he knew the leak was illegal -- when asked if the information could be published, he responded "My boss would eat me alive."
Citi senior analyst Mark Mahaney -- quoted in this space just this week, after he upgraded Facebook's rating after its earnings report -- was also a casualty of the investigation, for failing to properly supervise the junior analyst and providing a journalist with his thoughts on Google's (GOOG) YouTube earnings before making them public.
The actions are part of an investigation into information leaks on financial forecasts from Facebook's underwriting banks that showed slowing revenue gains for the company before its IPO, which were reportedly given only to large institutional customers. The IPO stock was sold at $38 a share, and small retail investors ended up with more of the shares than expected after large traders backed out. When word got out that Morgan Stanley told its large investors about weaker forecasts before the IPO, investors were angered and the investigation began.
"This is about not having two sets of rules one for preferred clients and one for everyone else," Galvin said.
Investigations into other underwriters, including Morgan Stanley, continue, Galvin said, and could result in similar actions.
"We are looking at all of them: Morgan Stanley, Goldman Sachs, JPMorgan," Galvin told Reuters. "It is a very active investigation,"
Meanwhile, a lawsuit that began long before Facebook's IPO reached a dramatic seeming conclusion Friday, as federal authorities arrested Paul Ceglia and charged him with fraud. Ceglia had sued Facebook co-founder and CEO Mark Zuckerberg, claiming that he had promised Ceglia part of the company for a $1,000 investment when Zuckerberg worked for him briefly in 2003.
Ceglia produced emails and a contract backing his story, but Zuckerberg and his lawyers countered that the CEO had not even conceived of his social network at the time, and charged that Ceglia had forged the evidence. Federal prosecutors have now agreed, charging Ceglia with mail and wire fraud, charges that carry a maximum penalty of 20 years in prison apiece.
Ceglia was looking for "a quick payday based on a blatant forgery," U.S. Attorney Preet Bharara said in a statement. "Dressing up a fraud as a lawsuit does not immunize you from prosecution."
Facebook was dealing with a new problem Friday, however, as it communicated with a Bulgarian blogger who claimed to have received private data on more than a million Facebook users for just $5. Facebook was communicating with the blogger to investigate the claim, according to a report.
Apple falls after earnings report, but price rebounds on bargain buys
Apple's earnings report didn't result in a rising stock price Friday; quite the opposite, shares in the most valuable U.S. company plunged lower than $600 Friday for the first time since July before investors smelling a bargain jumped in to buy shares and pushed Apple back up.
Apple's profits jumped 24 percent year-over-year in the most recent quarter, the company reported Thursday after the bell, but they still missed analyst estimates, and the company's prediction of a record-setting holiday quarter was also still below forecasts. Analysts from Morgan Stanley, Pacific Crest, Goldman Sachs, Evercore Partners and Nomura Equity Research reduced their price targets on the stock as a result, and shares dipped as much as 3 percent, to $591.
Even while cutting their price targets, analysts still issued notes that were bullish on Apple's prospects.
"We believe Apple's iPhone shipments and its commentary around supply improvements effectively eliminated a key short-term bear argument for the stock. We expect Apple to quickly regain some of its recent losses as a result," Goldman Sachs analyst Bill Shope wrote. He still cut his price target from $810 to $760, saying, "Apple has now missed two quarters in a row, and this should not be dismissed."
The company's stock price seemed like too much of a bargain to pass up for many investors. Shares closed at $604, a 0.9 percent daily dip. Apple stock has now dropped 13.8 percent since the launch of the iPhone 5 on Sept. 21, as concerns about production delays on the company's new smartphone and the pricing of the new iPad Mini have spread.
Indexes flat as Netflix zooms higher on Microsoft takeover rumors
Apple's mid-session rebound helped Wall Street end the day relatively flat, as none of the three major U.S. indexes moved as much as 0.1 percent after falling along with the Cupertino tech giant in the morning.
"As people chose to buy the dips in Apple, I think that gave people a little bit more conviction to buy other names," Wedbush Morgan senior trader Michael James told Reuters. "You've also had a continued theme of buying semiconductor stocks after disappointing earnings."
The big gainer on the day, however, was Netflix, which suddenly saw huge gains in the afternoon session and ended up 13.1 percent at $69.58, erasing losses experienced after the Los Gatos video-on-demand service disappointed investors with its streaming-customer growth earlier this week.
Netflix was helped by rumors of a buyout by tech giant Microsoft, which was burgeoned by Netflix co-founder and CEO Reed Hastings' recent exit from the Microsoft board. Forbes writer Eric Savitz detailed the rumors, and noted that Microsoft has $69 billion in the bank, which would give it plenty of ammunition to buy a company with a market cap south of $4 billion.
Microsoft also gained on the day, adding 1.2 percent as it continued a newsworthy week with the official launch of its Surface tablet, which went on sale at selected Microsoft stores one day after the company's Windows 8 launch event.
Silicon Valley tech stocks
The tech-heavy Nasdaq composite index: Up 1.83, or 0.06 percent, to 2,987.95
The blue chip Dow Jones industrial average: Up 3.53, or 0.03 percent, to 13,107.21
And the widely watched Standard & Poor's 500 index: Down 1.03, or 0.07 percent, to 1,411.94
Check in weekday afternoons for the 60-Second Business Break, a summary of news from Mercury News staff writers, The Associated Press, Bloomberg News and other wire services. Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/mercbizbreak.