Potential Violation of Landmark Wall St. Settlement in 2003.

[ by Howard Haykin ]

Morgan Stanley was hit with first disciplinary sanction stemming from the the fallout related to the troubled debut of Facebook.  William Galvin, Massachusetts's top financial regulator, announced that a $5 million fine was levied against Morgan Stanley for violating securities laws.

Specifically, the regulator accused the bank of improperly influencing the IPO process - a consent order alleges that a senior Morgan Stanley banker coached Facebook on how to share information with stock analysts who cover the social media company, a potential violation of a landmark Wall Street settlement in 2003.  Those actions, Mr. Galvin said, put ordinary investors who did not have access to the research at a disadvantage.

Banker Not Accused.   The Morgan Stanley banker was not named in the announcement;  nor was he personally accused of any wrongdoing.  His identity - as Michael Grimes - was obtained from the consent order.  Grimes is one of the country's most influential technology bankers. 

A spokesperson for Morgan Stanley said the company was pleased to put the matter behind it, noting, "Morgan Stanley is committed to robust compliance with both the letter and the spirit of all applicable regulations and laws."  Mr. Grimes, through the firm spokesperson, declined to comment.

Another Look Back at the Facebook IPO.  As one of the most highly anticipated stock launches of the last decade, the FB IPO quickly turned into a debacle for Morgan Stanley.  The first day of trading was plagued with problems, and shares of Facebook quickly fell below its offering price of $38.  Shares continued to struggle, hitting a low of $17.55.  Currently, shares trade at $26.70.

In the days leading up to Facebook's debut, analysts at several banks ratcheted down their growth estimates for the social network. The move came after Facebook issued an amended prospectus, detailing a potential slowdown in revenue - due to the company's readiness to adequately serve the smart phone population. 

In subsequent private conversations with a group of analysts, additional information was revealed that quarterly and annual revenue would be on the softer side. The complaint indicated that Mr. Grimes was personally involved in the decision to file the new prospectus and have Facebook communicate with analysts.

"Morgan Stanley's senior investment banker did everything but make the phone calls himself.  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 when calling the research analysts."  -- William Galvin.

Galvin further added that the banker "did everything he could to ensure research analysts received new revenue numbers which they then provided to institutional investors."

Just 12 minutes after filing the amended prospectus with regulators on May 9, the Facebook treasurer began to phone the Wall Street research analysts from her hotel room, according to the complaint.  She started with a 15-minute conversation with Morgan Stanley's analysts, and then spoke with JPMorgan analysts and a dozen or so other banks.

The calls provided the analysts with additional information that did not appear in the amended prospectus, the order said.  The calls, for example, included "quantitative information regarding Facebook's second-quarter 2012 projections."

This and other behavior, Mr. Galvin said, crossed the line, violating a regulatory settlement on stock research that Morgan Stanley and other firms signed in 2003.  The 2003 deal limited the communication between bankers and research analysts and banned them from influencing stock reports in an effort to bolster banking operations.

For further details, go to:   [Dealbook, 12/17/12].