Morgan Stanley Gets Light Slap On The Hand With Facebook IPO Fine

December 18th, 2012 by Trefis Team
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In what is the first regulatory action against Morgan Stanley (NYSE:MS) for its role in Facebook’s (NASDAQ:FB) botched IPO this May, the global investment bank has been fined $5 million by the Massachusetts securities regulator. [1] Considering the fact that retail investors (not institutional investors with deep pockets) lost an estimated $630 million from the IPO, the fine is hardly commensurate with the magnitude of the issue. [2] But then, despite the fact that Morgan Stanley neither admitted nor denied wrongdoing on the charges of influencing Facebook to release a negative revenue outlook days before the IPO, the fine could be a precursor of more to follow. And the other underwriters – JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) – may also be staring at similar charges and fines.

We have a $19 price estimate for Morgan Stanley’s stock, which is around the current market price.

See our full analysis of Morgan Stanley

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The fine imposed by the Massachusetts securities regulator on Morgan Stanley follows reports that senior employees at the bank coached Facebook executives through a series of analyst events on how to share information with stock analysts, which had a direct and marked impact on the perception of the technology company’s share price. Facebook’s shares lost a quarter of their value within a fortnight of the IPO and continued to decline for well over two months before finally recovering.

Morgan Stanley pocketed millions from its involvement in the IPO, something we had outlined in the article Banks Earn Nice Facebook Fees Despite Shares Trading Lower Post IPO. And reports alleged that the bank selectively disclosed insider information to clients to help them benefit from the IPO too – at the expense of retail investors. This is where the Massachusetts watchdog comes in, as all investment banks had signed an agreement to wall off their advisory and research teams almost a decade ago.

While the fine in itself will have little impact on Morgan Stanley’s earnings, it opens the possibility of other such fines being imposed, or settlements being forced on the bank in the future. And the cumulative impact of all the fines could impair its investment banking margins in subsequent quarters.

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Notes:
  1. Morgan Stanley fined over Facebook IPO, Financial Times, Dec 17 2012 [↩]
  2. Facebook IPO: Retail Investors Lose Out While Wall Street Clients Make Profits, Huffington Post, May 24 2012 [↩]