Morgan Stanley Fined for Blowing Facebook (FB) IPO

Morgan Stanley was hit with a $5 million fine for brazenly breaking the law in their role as the lead underwriter for Facebook’s (FB) IPO. The Secretary of the Commonwealth of Massachusetts, William Galvin, levied the fine for what he described as, “…a clear violation of the global research analyst settlement that Morgan Stanley signed with Massachusetts in 2003.” Mary Claire Delaney, a spokesperson for Morgan Stanley said the firm is, “pleased to have reached a settlement with Secretary Galvin,” and “to have put this matter behind us.”

Allegations Say Morgan Stanley “Coached” Facebook’s Treasurer

Although Morgan Stanley abstained from claiming innocence or admitting guilt, the charges levied against the investment banking firm allege that one of its senior bankers, Michael Grimes, wrote a script for Facebook’s treasurer to use in a phone call with research analysts. Secretary Galvin’s accusation says the banker crossed the line and committed a clear ethics violation by coaching the Facebook treasurer to provide analysts with information about the company’s revised financial forecasts, although this information was not made available to the public.

The crux of the issue is that the information shared with the analysts gave Morgan Stanley an unfair advantage and put other investors at a distinct disadvantage by the information not being made available to everyone.

Previous Investment Banking Improprieties

The global research analyst settlement in 2003 involved ten of the largest investment banking firms on Wall Street who collectively paid $1.4 billion. Morgan Stanley was included in that settlement, which cost them over $100 million. The accusations in that action centered around conflicts of interest between investment banking firms and their research departments.

Nothing More Than a Slap on the Wrist

Based on his statements, William Galvin seems to think a $5 million fine is a big deal. He commented, “With it we will get their attention and begin to take steps in restoring some confidence for retail investors to invest.”

Morgan Stanley raked in $68 million in fees from the Facebook IPO, so a fine that amounts to less than 7.5% of their fee seems like a small price to pay for blatantly violating securities regulations, not to mention putting Main Street investors at a disadvantage at IPO time. If Galvin expects to send a message about compliance, he will need to impose fines that have some teeth. For a company Morgan Stanley’s size, $5 million is like a jaywalking ticket in the grand scheme of things.

One would think enforcement actions, such as the 2003 settlement, would have had some impact because of the magnitude of the penalties involved. However, as the current allegations seem to show, maybe even that wasn’t enough to act as a deterrent to deep pocket investment banking firms.

History Repeats

If history is a teacher, and it always is if we pay attention, this little fine and its accompanying press coverage will be swept under the rug quickly. Morgan Stanley is not the only investment bank that will continue to conduct business as usual. Other investment banking firms will get the message that William Galvin sent. Unfortunately, the message they receive wont’ be the one Galvin tried to send.