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Morgan Stanley gets a $5 million “improper influence” slap on the wrist during Facebook IPO by Massachusetts’ securities regulator

December 21st, 2012 by Steven Barnes

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The Commonwealth of Massachusetts has fined Morgan Stanley $5 million over its “improper influence” activity during Facebook’s initial public offering (IPO). In 2011, Morgan Stanley recorded $32.4 billion in revenue. The firm was the lead underwriter for the Facebook IPO last spring, and their actions led to criticism and legal complaints from shareholders who claimed that certain material information was concealed prior to the highly touted and promoted stock offering. When the share price plummeted from an opening day value of $45.00 to the high twenties, shareholders were enraged. The share decline amounted to over $40 billion of value loss. The state issued a consent order proclaiming that Morgan Stanley had engaged in dishonest and unethical practices. In signing onto the consent decree, Morgan neither admitted nor denied the statement of facts in the text. That was also indicative of the violations of law outlined in the decree.

According to the consent order, Facebook’s finance chief informed Morgan Stanley’s senior investment bankers on the first day of the IPO road show that they were no longer confident in the revenue guidance previously offered to analysts. This guidance often forms the basis for the projected revenue of the company, and basis for the IPO share price. It’s been reported that both parties discussed amending the S-1 registration filing, which was done on May 9. However, Morgan Stanley’s senior investment advisor orchestrated phone calls by Facebook’s treasurer to analysts, conveying specific quantitative information that was not disclosed in the S-1, according to the Massachusetts’ regulator. As a result, a disservice was done to retail investors who were left to interpret less specific information in the S-1, while research analysts’ revised forecasts were only made available to professional investors.

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