An IPO that should have made Morgan Stanley the envy of all its Wall Street competitors is turning into a bit of a mess.
It wasn't long ago when Morgan Stanley was named lead underwriter in the Facebook IPO, and many called it a blow for rival Goldman Sachs. Days after the hyped IPO though Morgan Stanley is feeling the heat as Facebook shares get pummeled and regulators begin asking the firm questions.
Today there's news that the investment bank has been issued a subpoena by Massachusetts Secretary of Commonwealth William Galvin. That comes after reports that Morgan Stanley and other underwriters cut their outlooks for Facebook's revenue growth during the IPO roadshow. As my colleague Steve Schaefer points out that could be bad news for Morgan if the information was only shared with certain clients.
A spokesperson for Galvin told Reuters, "The Securities Division has put out a subpoena to Morgan Stanley in connection with the analyst's discussion with certain institutional investors about the revenue prospects for Facebook."
Here's a statement from Morgan Stanley responding to reports that it downgraded Facebook just before the roadshow:
"Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations. After Facebook released a revised S-1 filing on May 9 providing additional guidance with respect to business trends, a copy of the amendment was forwarded to all of MS's institutional and retail investors and the amendment was widely publicized in the press at the time. In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information. These revised views were taken into account in the pricing of the IPO. "
The reports of sharing information with certain clients may sound familiar. Just last month Goldman Sachs settled claims by the SEC and FINRA that its its analysts shared non-public short-term trading ideas with favored clients. Goldman forked over $22 million but didn't admit or deny allegations that its equity analysts met during weekly “huddles” with the firm’s traders to discuss “material, nonpublic information about upcoming research changes” that would eventually be shared with a select group of top clients.
Be sure that the SEC and FINRA are looking into the Morgan Stanley/Facebook deal, too. FINRA chairman Richard Ketchum says his group is looking at allegations that Morgan shared negative news before Facebook's initial public offering with institutional investors, Reuters reports. "The allegations, if true, are a matter of regulatory concern" to FINRA and SEC, Ketchum told Reuters.
