Morgan Stanley Settles for $5 Million with Regulator for its involvement in Facebook IPO

Morgan Stanley recently agreed to pay a $5 Million fine for its involvement in Facebook’s initial public offering.  The fine was agreed to without admitting or denying wrongdoing, and settled charges from a Massachusetts regulator that claimed the firm violated an earlier settlement agreement blocking investment bankers from influencing analysts.

In 2003, ten brokerage firms were penalized for their conduct during the dotcom bubble.  The 2003 settlement noted that the brokerage firms engaged in acts that were considered conflicts of interest between research analysts and investment bankers, and that the respective firms did not manage the conflicts appropriately.  The current  potential violation of the settlement arose when a senior Morgan Stanley investment banker informed an analyst that David Ebersman, Facebook’s CFO, believed revenue for the second quarter and full year would be lower than anticipated.

Fearing his conduct did not comply with the 2003 settlement, the banker convinced Ebersman to file an updated S-1 registration statement.  The senior investment banker testified that his solution was an attempt to “update analyst guidance without creating the appearance of not providing the underlying trend information to all investors.”  Ebersman wrote to the board that the updated S-1 would “help us to continue to deliver accurate messages at the road show meetings (without someone claiming we are providing any selective disclosure to big accounts only).”

Immediately after the filing of the S-1, Facebook’s Treasurer made 15-minute update calls to about twenty syndicated research analysts.  The senior investment banker rehearsed with the Treasurer for these calls, but was not present in the room when the calls were placed.  The $5 Million fine comes out of what Forbes approximates to be a $68 Million fee from Facebook for their work as an underwriter for its May offering.

According to the Chicago Tribune, the litigation concerning the Facebook’s IPO is not over.  A proposed class-action case has accused Facebook of misrepresentations of its financial condition leading up to the companies much-anticipated IPO.  Collectively, the group has claimed over $7 million in damages.

For previous Network coverage of Facebook’s IPO, see here and here.