In the aftermath of Facebook’s ill-fated initial public offering, it was hard to blame Joe Facebook-fan for feeling like he’d gotten screwed. Not only had the share price failed to pop, it had plummeted, 13 percent in the first week of trading alone, not the results anyone expected before hopping on Mark Zuckerberg’s supposed-gravy train.
But screwed how, exactly? After all, it wasn’t just the retail investors that bit the bullet on Facebook’s ill-fated initial public offering. And much of the attention in the weeks after the IPO centered on Nasdaq’s technical glitches, not mom-and-pop’s informational disadvantage with respect to deep-pocketed institutional investors.
Well, now there’s some hard evidence pointing to the notion that the retail investor didn’t get a completely fair shake: In a consent order released today, the Massachusetts state security regulator fined Morgan Stanley $5 million, after a senior investment banker at the firm advised Facebook to share certain revenue projections with research analysts—projections that never made it into Facebook’s public filings.
Here’s the gist of it:
On May 3, Facebook filed an amended S-1 with the Securities and Exchange Commission, in which the company identified its now-famous mobile problem: Many of its new users were accessing the social media site through mobile phones, but the company was struggling to deliver ads to said devices, leading the company to cast doubt on its own previous revenue projections.
Four days later, Facebook launched its IPO roadshow, meeting with investors in advance of its May 18 offering. According to the Massachusetts consent order, on May 7, Facebook chief financial officer David Ebersam told a senior Morgan Stanley investment banker—not identified in the legal documents, but widely believed to be Silicon Valley insider Michael Grimes—that second quarter numbers had diminished Mr. Ebersam’s confidence in the company’s projections.
What to do? Mr. Grimes and Mr. Ebersam got together with Facebook counsel and decided to put out another amended S-1, to ensure that all investors had equal access to the CFO’s misgivings on 2012 revenue. So far, so good. Then, according to the documents, Mr. Grimes suggested that Mr. Ebersam get on the phone with the 20 research analysts covering Facebook to discuss the new filing.
And that was a problem. Mr. Ebersam declined to make the calls himself, instead delegating the responsibility to Facebook’s treasurer, who isn’t named in the consent order. Mr. Grimes wrote out a script, and eight minutes after Facebook filed a new S-1 was filed, the treasurer started to dial.
Here’s the script, as reproduced in the consent order:
It appears that it was Mr. Grimes close involvement with the process that violated the Global Research Analyst Settlement—which requires banks to maintain so-called Chinese Walls to avoid conflicts of interest between their research and underwriting divisions—and led to the Massachusetts fine.
Indeed, Mr. Grimes seems to have been aware that he was skirting legaility. In his testimony before the Massachusetts regulator, Mr. Grimes said, “I was far down the hall so I wouldn’t hear anything; I took extra precaution to do that, and sat on the floor.”
But if you’re investor who lost money on the Facebook IPO, more material to your concerns might be this: In the script Mr. Grimes authored, the banker instructed the Facebook treasurer to say “we believe we are going to come in the lower end of the $1.1. to $1.2 bn range for Q2 based upon the trends we described in the foreclosure.”
That was vital information that never made it into the public disclosure, and while you might ask over how much the information might have changed the average retail investors behavior, Massachusetts Secretary of State William F. Galvin isn’t quibbling:
“The improper influence of Morgan Stanley’s investment bankers over research analysts is yet another example of an unlevel playing field, where Main Street investors were put at a significant disadvantage to Wall Street,” he said a statement.