Morgan Stanley Fined $5M; Fallout from Facebook IPO Continues

Morgan Stanley, the lead underwriter for the Facebook initial public offering (IPO), was fined $5 million for creating an uneven playing field among investors, Massachusetts’s top securities regulator said this week.

William F. Galvin, the secretary of the commonwealth of Massachusetts, said a Morgan Stanley senior investment banker improperly influenced the stock offering process by coaching Facebook to share stock information. That gave an unfair advantage to investors close to the $16 billion IPO and violated securities laws that oversee how investment research can be distributed.

Mounting Criticism

Since Facebook went public in May, the New York City-based Morgan Stanley has faced mounting criticism for the way it coached Facebook executives to disclose sensitive information. Even before the company went public, Morgan Stanley released revised earnings and revenue forecasts to select clients, regulators 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,” Galvin told The New York Times. “We want to get the message across that if Wall Street wants to get confidence back, they can’t disadvantage Main Street.”

The Morgan Stanley senior investment banker who oversaw the IPO was not named in court documents, but multiple news sources named him as Michael Grimes, a top Morgan Stanley technology banker. Grimes has not been accused of any wrongdoing.

A Morgan Stanley spokeswoman said the company is “committed to robust compliance with both the letter and the spirit of all applicable regulations and laws.” The company neither admitted nor denied any wrongdoing.

Galvin said this is the first in what could be a multi-bank investigation. Goldman Sachs and JP Morgan also acted as underwriters during the Facebook IPO. As the lead underwriter, Morgan Stanley played the biggest role – taking $68 million in fees from the IPO. The underwriting fee for all underwriters was $176 million, Reuters reported.

“The conduct at Morgan Stanley was more egregious,” Galvin told Reuters. “With it, we will get their attention and begin to take steps in restoring some confidence for retail investors to invest.”

Questions and Lawsuits

While the initial price tag for the Facebook IPO ranged from $28 to $35 per share, that price increased to $34 to $38 days before the IPO.  The stock opened at $42.05 per share but closed at $38.23. Within days, the stock fell below $30 per share. Today, the stock is at $26.75.

In addition, regulators are looking into Nasdaq, the exchange where Facebook trades, to question why the exchange experienced technical glitches on the morning of the offering. Nasdaq’s software malfunctions left many Facebook investors in the dark about what they had purchased on the morning of the offering and at what price. This caused market uncertainty, Facebook said in a court filing.

More than 40 lawsuits have been filed against Facebook in state and federal courts nationwide after the IPO debacle. Facebook responded by saying the problems with the IPO were not its fault. The company wants the lawsuits consolidated into one case in a New York court.

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