Morgan Stanley (NYSE:MS), the principal underwriter of the $109 billion initial public offering of Facebook (NASDAQ:FB) was fined $5 million by Massachusetts regulators for improper supervision of analysts before the May 17 IPO.
William Galvin, the Commonwealth Secretary of Massachusetts who functions as its chief financial regulator, said failing to disclose information about Facebook's future financial performance was “a clear violation” of a 2003 settlement in which Wall Street firms agreed to separate their reseach and underwriting units.
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While a mere pittance compared to the $176 million in fees shared by Morgan Stanley and its lead partners, JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS) in the Facebook IPO, which involved more than a dozen other firms, it could be powerful ammunition in a massive class-action lawsuit scheduled to be tried next year.
A panel of 11 federal judges has yet to determine the venue for that case, which is intended to consolidate claims that insiders were advised Facebook's second-quarter results would be less than those predicted in the IPO documents. Morgan Stanley's acknowledgement of negligence could be powerful ammunition to angry Facebook shareholders.
Citibank (NYSE:C) was fined $2 million in October by Galvin for not supervising its Internet analyst, Mark Mahaney, who was fired, along with a subordinate.
Morgan Stanley, based in New York, said it was “pleased to have reached a settlement” in the Facebook case. The financial company said it was “committed to robust compliance with both the letter and the spirit of all applicable regulations.” Technically, its consent decree is not an admission of guilt.
Galvin said Morgan Stanley was advised during the run-up to the Facebook IPO by the company's CFO, David Ebersman, and former treasurer, Cipora Herman, that earnings of the Mountain View, Calif., social media website wouldn't meet IPO prospectus numbers. But the documents on file for investors weren't amended before the actual share sale.
Shares of Morgan Stanley rose 48 cents to $18.53 on Monday, while those of Facebook fell 2 cents to $26.79, or 30 percent below their IPO price of $38.