(Adds estimate of Morgan Stanley IPO fee, details on banker)
By Svea Herbst-Bayliss
BOSTON, Dec 17 (Reuters) – 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.
Massachusetts’ 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.
Morgan 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.
Facebook 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.
A 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 wrongdoing.
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 October.
“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.
Massachusetts 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.
The 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.
The 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.
The 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 said.
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.
Retail investors were not given any similar information,
Galvin said, saying this case illustrates how institutional
investors often have an edge over retail investors.
(Reporting by Svea Herbst-Bayliss with additional reporting by
Suzanne Barlyn and Lauren Tara LaCapra in New York; Editing by
Theodore d’Afflisio, Andrew Hay and Richard Chang)
