[ by Melanie Gretchen ] As if being the lead underwriter for Facebook's $16 billion IPO wasn't enough, Morgan Stanley's affiliated mutual funds have taken on disproportionate Facebook share positions.  Some of the shares were purchased prior to the IPO, which means they are restricted securities and must be held for a certain period of time. How Exposed are the Morgan Stanley Funds? Well, mutual funds affiliated with Morgan Stanley consistently hold larger positions of Facebook shares - relative to total assets in each fund - than all but one other U.S.-based mutual fund - i.e., the market value of the Facebook shares held in each fund computed as a percentage of that fund's total assets. The bottom line is that eight (8) of the 9 funds with the largest relative holdings in Facebook are affiliated with Morgan Stanley.  Depending on such a concentration, that is either wonderful or draconian for the fund, depending on the performance of share price.  Because Facebook shares have fallen so precipitously in price since the IPO in the Spring of 2012, shareholders in these funds cannot be all too happy. According to the asset management unit's pages on the Morgan Stanley website:

• Morgan Stanley Focus Growth Portfolio had 5.7% of its assets invested in Facebook shares as of 7/31/12.
• Morgan Stanley Institutional Opportunity Portfolio had 5.5%.
• Morgan Stanley Institutional Growth Portfolio had 4.8%.
• The remaining 5 Morgan Stanley funds held varying amounts of Facebook shares in their portfolios, ranging from 3.6% to 4.6% of the fund's total assets.

A Conflict of Interest? As lead underwriter in the IPO, Morgan Stanley had responsibility for, not only executing the offering, but also setting Facebook up for trouble in the event of poor reception.  Three things the securities firm contributed to:

• lining up orders for Facebook
• advising Facebook executives to increase the size and price of the IPO, despite warnings the company was making about its profit outlook
• taking in $200 million in underwriting fees and trading profits, according to regulatory filings and people involved in the deal

While neither Morgan Stanley nor any of its funds has violated any SEC rules with these significant FB holdings, there's little or no reason for cheer.

A large investment bank that simultaneously buys and sells shares in any company "is in this conflicted position.  This time it didn't work out." -- Frank Partnoy, a law professor at the University of San Diego who worked for Morgan Stanley in the 1990s.

For further details, go to [WSJ, 8/24/12].