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Morgan Stanley Fined $5 Million by Massachusetts on Facebook IPO

Morgan Stanley Fined $5 Million by State Over Facebook IPO
A slump in Facebook’s stock after it began trading in May has fueled shareholder complaints, regulatory probes and more than 40 lawsuits, with some investors claiming the Menlo Park, California-based social-network company’s managers failed to disclose revised forecasts before the IPO. Photographer: Peter Foley/Bloomberg

Morgan Stanley’s handling of Facebook Inc.’s initial public offering, a deal that cost investors billions of dollars, broke a decade-old pledge to block investment bankers from influencing analysts, according to Massachusetts regulators, who fined the bank $5 million.

A senior Morgan Stanley banker wrote a script that Facebook’s then-treasurer used to update research analysts on the company’s revenue outlook before the IPO, according to a settlement document with Secretary of the Commonwealth William Galvin. He faulted Morgan Stanley for dishonesty, ethics violations and failing to supervise employees -- the first regulatory claims to stem from the bank’s handling of the deal.

A plunge in Facebook’s stock after it began trading in May has fueled government probes and more than 40 lawsuits, with some investors claiming the social-network company failed to disclose revised forecasts before the IPO. The small size of Morgan Stanley’s fine relative to investors’ losses shows other regulators may struggle to pin much blame on the bank, said Erik Gordon, a professor at the University of Michigan’s Stephen M. Ross School of Business.

“They paid a little bit of lunch money as a fine, they’re not getting disqualified, and they agreed once again to abide by a consent order they agreed to nine years ago,” Gordon said yesterday. “Coming from Massachusetts, where they could’ve gotten hit a lot harder, if anything, this is not encouraging to attorneys general.”

Influenced Research

Wall Street banks including Morgan Stanley agreed in 2003 to overhaul internal controls and wall off businesses after regulators found some firms let investment bankers influence analyst research. The abuses, which resulted in analysts recommending clients buy into IPOs handled by their own firms, helped fuel an Internet stock bubble that burned investors.

The Massachusetts consent order describes the process by which Facebook, with Morgan Stanley’s advice, put out a public filing alerting investors to negative revenue trends related to mobile advertising. Facebook’s treasurer at the time, working from a Philadelphia hotel, then called research analysts and gave them more-detailed estimates of the impact those trends would have on revenue in the second quarter and all of 2012, according to the document. The treasurer and the senior investment banker had rehearsed the conversations beforehand.

As calls took place, “I was far down the hall so I wouldn’t hear anything,” the banker told investigators, according to the order. “I took extra precaution to do that, and sat on the floor,” he said. The banker had e-mailed another executive that night to say the treasurer “was a champ.”

Specific Numbers

The order finds Morgan Stanley in violation of securities law against dishonest and unethical practices, without specifying what those practices were. Galvin, in a statement announcing the settlement, criticized the firm for helping Facebook provide analysts with more-detailed information than other investors received.

“While retail investors were left to interpret vague qualitative information” from a regulatory filing, analysts were given “specific numbers” to lower their revenue estimates, Galvin said in the statement. New York-based Morgan Stanley didn’t admit or deny Galvin’s claims in settling.

While the consent order didn’t name the investment banker involved, it said he had been employed at Morgan Stanley since May 1995 and worked in the bank’s Menlo Park offices. Michael Grimes, the firm’s global co-head of technology investment banking who helped lead the IPO, joined Morgan Stanley in May 1995 and works in those offices, according to records with the Financial Industry Regulatory Authority.

Grimes and a spokesman for Galvin’s office didn’t respond to messages seeking comment on the unidentified banker described in the complaint. Mary Claire Delaney, a spokeswoman for Morgan Stanley, declined to say whether Grimes is the banker.

Robust Compliance

“We are pleased to have reached a settlement with Secretary Galvin and the Massachusetts Securities Division and to have put this matter behind us,” Delaney said in an e-mailed statement. “Morgan Stanley is committed to robust compliance with both the letter and the spirit of all applicable regulations and laws.”

Ashley Zandy, a spokeswoman for Facebook, declined to comment on Morgan Stanley’s settlement.

Citigroup Inc. was fined $2 million by Massachusetts in October after a junior analyst improperly disclosed confidential information before Facebook’s IPO.

The U.S. Securities and Exchange Commission also is looking at the IPO, a person familiar with the probe said in October.

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