CNBC reported on Tuesday that Morgan Stanley was ordered to pay $5 million in fines associated with its research practices with Facebook and its public offering. The company is surely feeling like it’s been scrooged this holiday season, especially considering it’s the second time in the past six months it’s been hit with massive fines. In June, it was fined for its practices over non competitive trades.
This latest fine, however, has to do with Facebook going public in May. The one thing that many said could never happen did just that: it happened. The offering, which was strong at the beginning of the trading day, fizzled quickly. Soon, reports were being released that the banks on Wall Street that underwrote the deal shared their opinions with some clients, but failed to give “equal play” to investors and other clients without that advantage.
Late Monday, it was announced that Morgan Stanley had agreed to pay a $5 million fine to settle those allegations. With that agreement came a stipulation that it would not admit nor deny wrongdoing associated with the investigation. The fine settled those charges from regulators in Massachusetts that the company violated certain terms of a 2003 settlement involving 10 brokerage firms being fined and otherwise penalized for allowing investment bankers to influence research functions during the 1990s dotcom bubble.
Soft Revenue
According to the papers filed, a Morgan Stanley banker revealed to a colleague that the social network’s chief financial officer, David Ebersman, was convinced that second quarter revenue would be “softer”; in fact, the colleague said Ebersman believed revenue for the entire year would be lower than many were anticipating. The faulty formula included the rapid increase of smartphone usage that outpaced ad revenue growth.
Before long, the banker had met with his company’s attorneys and others in closed door meetings and began searching for ways to “update analyst guidance without creating the appearance of not providing the underlying trend information to all investors.” The senior banker, said the investigators, knew there were issues with the dynamics of the information being limited in its release. At that point, it was decided to file a revised S-1 document. Following that move, Ebersman then notified the board at Facebook that the additional disclosure efforts would allow it to remain truthful at different meetings; even still, some were worried it was unethical. It would eliminate the possibility, too, according to Ebersman, that anyone would be able insist selective disclosure was being used.
Facebook Meeting
Naturally, the next step was Facebook’s treasurer meeting with different bankers at some of the nation’s biggest banks, including Chase and Goldman Sachs. Once that meeting was concluded, other firms with interests in the underwriting underwriting syndicate were notified of the changes. It was also mentioned in the filing that while Ebersman left the room to make the calls, he also rehearsed what he would say with the treasurer, meaning no one was out of the loop of what was actually happening. That also resulted in those big banks to edit their own forecasts.
Galvin Factor
William Galvin, who is the Secretary of the Commonwealth of Massachusetts has had the nation’s biggest banks, including Morgan Stanley, in his crosshairs for quite some time. Not even two months ago, Citigroup was hit with a $2 million fine, courtesy of Galvin’s office. Those accusations included a Citi analyst who was said to be sharing information that had yet to be published that was also associated with the Facebook IPO. It was accused of “violating state securities law when it released confidential information about Facebook Inc.”. That information was also associated with Google.
If the $5 million fine that Morgan Stanley must now pay seems steep, you should know that Facebook to a financial hit to the tune of $176 million in fees. The funds were divvied up between at least thirty different financial firms. It was reported Morgan Stanley accepted close to $7 million for its efforts.
MP Presser
As soon as the settlement was reached, a Morgan Stanley spokesperson offered the following statement late Monday:
We are pleased to have reached a settlement with Secretary Galvin and the Massachusetts Securities Division and to have put this matter behind us. Morgan Stanley is committed to robust compliance with both the letter and the spirit of all applicable regulations and laws.
Still, for a company that racks up $25 billion annually, this $5 million fine is likely little more than pocket change. Facebook’s efforts continue to mar the massive social networking site, too, which is problematic for those with vested interests.
Since these fines won’t likely slow either company down, many are wondering why stiffer, more aggressive punishments aren’t been doled out. What are your thoughts? Share them with us and our readers.
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