tuesday, 18 december of 2012

Morgan Stanley gets Facebook fine


Morgan Stanley gets Facebook fine

Morgan Stanley agreed to pay $5 million to settle allegations that one of its highest-profile investment bankers tried to "improperly influence" research analysts days before Facebook Inc. went public in May.

Michael Grimes, the bank's technology guru who convinced Facebook officials to make Morgan Stanley the lead underwriter on the company's initial public offering, flouted a landmark conflict-of-interest settlement between Wall Street firms and regulators, a Massachusetts regulator said Monday.

There were no individuals named in the order, but people familiar with the matter identified Mr. Grimes as the "senior investment banker" who allegedly handwrote a script that was used by the finance chief at the social-networking company to lower revenue expectations as the IPO loomed.

Massachusetts Secretary of the Commonwealth William F. Galvin said in an interview that the behavior "undermines investor confidence."

The Massachusetts action is the first official rebuke related to the Facebook deal, which had a disappointing debut. The Securities and Exchange Commission and Financial Industry Regulatory Authority, a Wall Street self-regulator, each have continuing probes, according to people familiar with those investigations.

Morgan Stanley didn't admit or deny the allegations. A spokeswoman said the firm was glad to "put this matter behind us" and that the securities firm "is committed to robust compliance with both the letter and the spirit of all applicable regulations and laws." Mr. Grimes and other Morgan Stanley employees referred to in the Massachusetts action aren't expected to face any repercussions at the bank, said one person familiar with the case. Mr. Grimes didn't respond to a request for comment.

The settlement announced Monday focuses on one of the most controversial parts of the offering: Facebook's discussions with research analysts at investment banks about declining revenue estimates that were relayed to the banks' large clients but not small investors.

Given the legions of individual investors excited about the $16 billion deal, the different treatment proved a flash point for the widely anticipated offering. The deal has instead turned into a series of headaches and lawsuits after shares fell from the offering price of $38 to less than $20 before recovering in recent weeks. Facebook shares closed Monday at $26.79, down 2 cents, or .1%.

A Facebook spokeswoman declined to comment.

Massachusetts said that Morgan Stanley's senior investment banker on the deal "orchestrated" phone calls from Facebook to analysts in a way that favored large investors over small ones and that violated restrictions on bankers' role in the IPO process.

Mr. Galvin is still looking at various aspects of the Facebook deal. He earlier sent subpoenas to Morgan Stanley and the deal's other two lead underwriters, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co.

The consent order Monday zeroed in on the issue of the role of investment bankers in dealing with stock analysts.

A 2003 settlement between state and federal regulators and Wall Street banks restricted communications between bankers and analysts in an effort to protect analysts from pressure to tilt their research to attract or retain investment-banking clients.

Mr. Galvin alleged that Morgan Stanley circumvented those rules during Facebook's IPO.

On May 7, the first day of Facebook's "roadshow" pitching the shares to large investors, Facebook officials told Morgan Stanley bankers that revenues would likely come in softer than analysts' expectations, Mr. Galvin's order said.

The Morgan Stanley senior investment banker advised Facebook Chief Financial Officer David Ebersman that "updating analyst guidance would be a good idea."

To that end, on May 9, Facebook filed a revised prospectus that informed investors of potential risks to revenue, based on trends in mobile advertising. Within minutes of that 5:03 p.m. filing, Facebook's treasurer started hitting the phones from a Philadelphia hotel with a script that had been handwritten by Mr. Grimes, according to Mr. Galvin's order.

The script included changes in projected quarterly revenues, from a $1.1 billion to $1.2 billion range down to the lower end of that range. That information wasn't in the public filing.

According to the order, the senior investment banker told regulators he was "far down the hall so I wouldn't hear anything" at the time of the treasurer's calls, adding "I took extra precaution to do that, and sat on the floor."

Later that night, the banker emailed Mr. Ebersman to say the treasurer "was a champ in the hotel tonight."

The treasurer referred to in the Massachusetts order, Cipora Herman, no longer works at Facebook and is now the finance chief for the San Francisco 49ers football team. She didn't immediately respond to a request for comment.

Mr. Galvin said that the company could have halted the IPO or considered more broad disclosure that would have alerted all investors to Facebook's specific revenue projections.

The suit puts more focus on Mr. Grimes, who has been associated with the Facebook IPO since his firm got the coveted assignment to lead the Facebook deal early in 2012. Mr. Grimes, who has landed Morgan Stanley on numerous other high-profile tech deals, has been close with Mr. Ebersman for years. On this deal, he pushed for Morgan Stanley to be the "sole driver" on the advice about the IPO, minimizing the influence of other banks on the underwriting team.

Morgan Stanley isn't the only bank that has drawn scrutiny. Mr. Galvin also fined Citigroup $2 million in October for failing to supervise two analysts, both of whom followed Facebook, among other stocks.

(Published by WSJ - December 18, 2012)

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