Although Facebook’s IPO was a troubled one even at the start, Morgan Stanley was accused by the commonwealth of Massachusetts of improperly influencing the overall process of the stock offering. The consent order from the regulator says that a senior banker from Morgan Stanley taught Facebook how to give information to those stock analysts covering the company, a clear violation of a historic legal settlement with Wall Street before. Though the banker did not have direct communication with analysts, his actions, as per William F. Galvin, the secretary of the commonwealth of Massachusetts, put competing investors at a disadvantage because of their lack of access to the same research.
In an interview, Mr Galvin said: “The broader message here is we are going to use any means possible to enforce the strict code in place about giving out information. We want to get the message across that if Wall Street wants to get confidence back, they can’t disadvantage Main Street.”
The consent order did not reveal the name of the Morgan Stanley banker, but instead constantly referred to him as a “senior investment banker”. However, details about the regulator’s order shows the name of Michael Grimes, one of the most respected technology bankers in the country.
For its part, the bank did not admit nor deny the guilt of its banker. Spokesperson Mary Claire Delaney said that her company is abiding by the mandate of the letter and all “applicable regulations and laws”.
She also did not give any hint about Mr Grimes comment on the case. He was not personally accused of any violation.
The fine is not that significant when taking into consideration the $68 million the bank got in underwriting fees from Facebook’s IPO, a source from Thomson Reuters said.
Costs related to the botched IPO are rising. On top of the fine imposed by Mr Galvin, Morgan Stanley agreed to compensate a number of overpaying customers following their purchase of Facebook shares due to technical difficulties at the Nasdaq.
Facebook’s IPO was a highly anticipated debut during this decade. In the months leading to the offering, investor interest was high, pushing the company to further increase the share price to $38.
However, the offering quickly turned into a costly debacle during its first day of trading as shares fell quickly below their offering price.
The sharp drop in share price prompted Mr Galvin and some other regulators to look into the issue, including the company’s association with the banks handling the debut. The ongoing inquiries led by the Securities and Exchange Commission and the Financial Industry Regulatory Authority are looking into how banks shared nonpublic information to big investors, and whether such action ran against Facebook’s public disclosures.
Nasdaq was also included in the sights of regulators. The chosen exchange of Facebook, Nasdaq is being questioned about an allegation that it may failed to test its trading systems during the stock offering, causing trouble to the process.
The main focus of Mr Galvin centers on Morgan Stanley’s link with the analysts throughout the offering.
Before the public offering was to take off, Facebook announced a modified outlook saying that there was a potential slowdown in revenue, prompting analysts at several banks covering the IPO to lower their growth estimates for the company.
An executive from Facebook, referred to as the treasurer by Mr Galvin’s order, allegedly tried to communicate with analysts. Mr Galvin asserted that the executive provided that the executive added some information on the revenue to analysts in private conversations. Mr Grimes was reportedly directly influencing the decision to provide a changed prospectus, and was forceful in pushing Facebook to communicate with analysts.
“Morgan Stanley’s senior investment banker did everything but make the phone calls himself,” Mr Galvin’s order said. “He not only rehearsed with Facebook’s treasurer who placed the calls to the research analysts, but he also drafted the majority of the script Facebook’s treasurer utilized.”
The Massachusetts regulator also stated in his report that 12 minutes after filing the modified prospectus with regulators on May 9, the Facebook treasurer called analysts from Wall Street from her hotel. The order asserted that she had a 15-minute conversation with analsyts from JPMorgan Chase, Morgan Stanley, and other banks.
According to the order, her calls gave analysts added information that were absent from the amended prospectus. The order gave an example, like “quantitative information regarding Facebook’s” projections for the second-quarter of 2012.
Such action, according to Mr Galvin, violated the regulatory settlement on stock research signed by Morgan Stanley, and some other Wall Street companies way back in 2003. the said agreement puts a restriction between research analysts and bankers, banning companies from influencing stock reports toincrease operations capabilities of banks.
Curiously, the Morgan Stanley case falls into a gray area.
Normally, it takes months for bankers to prepare companies for their IPO and such preparation includes giving research analysts guidance. In this case, Morgan Stanley’s Mr Grimes did not directly make the calls, which would have been tagged as direct violation of the agreement.
Mr Grimes, in his testimony, said that his bank did push Facebook to file an amended prospectus publicly to make it appear as if the company is sharing information to all interested parties, and not just on selected investors. Mr Galvin’s order did note that Mr Grimes consulted with Facebook attorneys and his bank. Facebook’s chief financial officer, David Ebersman, ultimately send an email to the company’s board saying that the new filing would “help us to continue to deliver accurate” information without “someone claiming we are providing any selective disclosure.”
Grimes also mentioned that while Facebook treasurer was placing her calls, he was far down the hall so he would not hear anything.
But the consent order also said that Mr Grimes send a congratulatory email to Mr Ebersman saying that the treasurer of Facebook “was a champ in the hotel tonight,” after she finished her calls.