Morgan Stanley, the lead underwriter for Facebook Inc's initial public
offering, will pay a $5 million fine to Massachusetts for violating
securities laws governing how investment research can be distributed.
top securities regulator, William Galvin, charged on Monday that a top
Morgan Stanley banker had improperly coached Facebook on how to disclose
sensitive financial information selectively, perpetuating what he calls
"an unlevel playing field" between Wall Street and Main Street.
Stanley has faced criticism since Facebook went public in May for
revealing revised earnings and revenue forecasts to select clients
before the media company's $16 billion initial public offering.
This is the first time a case stemming from Morgan Stanley's handling of the Facebook offering has been settled.
had privately told Wall Street research analysts about softer forecasts
because of less robust mobile revenues. A top Morgan Stanley banker
coached Facebook executives on how to get the message out, Galvin said.
Morgan Stanley spokeswoman said on Monday the company is "pleased to
have reached a settlement" and that it 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
Galvin, who has been aggressive in policing how
research is distributed on Wall Street ever since investment banks
reached a global settlement in 2003, said the bank violated that
settlement. He fined Citigroup $2 million over similar charges in late
"The conduct at Morgan Stanley was more egregious," he
said in an interview explaining the amount of the fine. "With it we will
get their attention and begin to take steps in restoring some
confidence for retail investors to invest."
Galvin also said that
his months-long investigation into the Facebook IPO is far from over and
that he continues to review the other banks involved. Goldman Sachs and
JP Morgan also acted as underwriters. The underwriting fee for all
underwriters was reported to be $176 million at the time, or 1.1 percent
of the proceeds.
As lead underwriter, Morgan Stanley took in $68 million in fees from the IPO, according to a Thomson Reuters estimate.
did not name the Morgan Stanley banker in its documents but personal
information detailed in the matter suggest it is Michael Grimes, a top
technology banker who was instrumental in the Facebook IPO.
report says the unnamed banker joined Morgan Stanley in 1995 and became a
managing director in 1998, dates that correlate with Grimes' career at
the firm. It also says the banker works in Morgan Stanley's Menlo Park,
California, office, where Grimes also works.
Grimes did not immediately respond to a request for comment, and was not accused of any wrongdoing by name.
state said the banker helped a Facebook executive release new
information and then guided the executive on how to speak with Wall
Street analysts about it. The banker, Galvin said, rehearsed with
Facebook's Treasurer and wrote the bulk of the script Facebook's
Treasurer used when calling the research analysts.
A number of
Wall Street analysts cut their growth estimates for Facebook in the days
before the IPO after the company filed an amended prospectus.
Facebook's treasurer then quickly called a number for Wall Street analysts providing even more information.
banker "was not allowed to call research analysts himself, so he did
everything he could to ensure research analysts received new revenue
numbers which they then provided to institutional investors," Galvin
Galvin's consent order also says that the banker spoke with
company lawyers and then to Facebook's chief financial officer about how
to prove an update "without creating the appearance of not providing
the underlying trend information to all investors."
The banker and
all others involved with the matter at Morgan Stanley are still
employed by the company, a person familiar with the matter said.
investors were not given any similar information, Galvin said, saying
this case illustrates how institutional investors often have an edge
over retail investors.
© Thomson Reuters 2012