Facebook’s recent victory in a court battle costs Citigroup $2 million dollar in fine and Mark Mahaney, a well-respected and well-liked internet analyst of the bank. A court from Massachusetts ruled that Citigroup should be fined for improperly revealing the financials of Facebook before the company went public.
The ruling is the first formal charge against the bank for allowing its underwriter to disclose financial information prior to the May IPO for Facebook. Although no charge was filed, Morgan Stanley had been heavily criticized after it revealed the social network’s earnings and revenue forecasts to pick clients on conference calls prior to the $16 billion May IPO, making the investing public largely unaware.
For Citi’s part, a subordinate of Mahaney sent out some emails to reporters from TechCrunch, who in turn revealed some of the information in their blog post, said the Massachusetts court.
The act violated the state of Massachusetts securities laws which bar analysts of underwriting firms from revealing “written research or other written content” until 40 days after a company’s IPO.
The state’s head regulator, William Galvin, would not comment whether or not other firms will also be charged or if there are other evidence. He added that it was easier for his office to prosecute Citi because there were emails that would directly show how the analyst violated the law.
Silicon Valley’s circle of analysts think firing Mahaney was not reasonable. Mahaney is a consistent recipient of praise from institutional investors.
Citi said in a statement that both Mahaney and his junior analyst were fired and that it was glad that the wrangling with the state is over.
Galvin has indicated that his office is still trying to to probe whether underwriters Goldman Sachs, JP Morgan Chase, and Morgan Stanley had also violated the rules.
Max Wolff, a chief economist from research company GreenCrest Capital, said: “Unfortunately, the message from this is that analysts should give less information to cover their behinds. But the smooth functioning of markets requires the exact opposite of this. This is a move in the wrong direction.”
There is still a murky area, according to experts, if industry rules bar brokerages from disclosing details to select groups of clients in a conference call like what Morgan Stanley did. Morgan Stanley is yet to face regulatory action from the state stemming from what its analysts did.
The Massachusetts complaint said that the junior analysts of Mahaney leaked some confidential Citi views of its bank on revenue estimates and investment risks for Facebook to two journalists from TechCrunch. The said leak happened three weeks before Facebook’s IPO on May 18.
Mahaney was implicated because he failed to supervise his subordinate.
The incident was not a first for the Silicon Valley star. He had previously been in trouble with his superiors for sharing confidential information to reporters.
Citi’s director of research for the Americas sent him a memo last April after he broke his bank’s rules when he talked to journalists from Bloomberg and the New York Times without first consulting the company’s legal experts.
Weeks after that, Mahaney again earned reprieve after he published another confidential views of Citi regarding Google Inc’s YouTube revenue estimates to a reporter of a French publication, Capital Magazine.
He worked at Citi in 2005 after leaving Galleon Group, the hedge fund of Raj Rajaratnam, who was eventually convicted of a massive insider trading.