Facebook Underwriter Morgan Stanley: Jack of all Trades or Master of None?

| Wednesday, 23 May 2012 13:27
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(eToro Blog) Facebook’s recent IPO launch is still taking center stage on Wall Street, as new data comes out which suggests that a series of unfortunate events conspired to make the launch far less than successful than markets had anticipated. Whether those events were intentional or not remain to be seen but are now the subject of separate investigations to determine cause and possible wrongdoing.

The latest word on the street is that Morgan Stanley, the lead underwriter for the Facebook IPO, communicated to certain institutional clients a new analysis which predicted that lowered the growth outlook for revenue generation. While not yet confirmed, it is believed that Goldman Sachs and JP Morgan Chase also advised their clients of the lowered forecasts.

Morgan Stanley has said that they followed procedures in place for all IPOs including Facebook’s. What is at the heart of the matter is not the undertaking of a new analysis in light of the revised SEC filing, but rather what they did or did not do with it. The investigation, which some expect the U.S. Securities and Exchange Commission will now get involved in, will likely focus on two key issues, including disclosure of privileged confidential information and selective communication to only a few clients.

According to one securities law professor, there is a regulation informally called the “jump the gun” rule which dictates how and when information, not specifically mentioned in a prospectus, can be disseminated about a company about to go public. But there is a loophole to the regulation; an exception is made for the verbal communication of such information.

It could eventually emerge that Morgan Stanley’s dual role resulted in a conflict of interest for Facebook and its investors. On the one hand, wearing the lead underwriter hat, Morgan Stanley would surely want to paint the brightest picture possible. However, with its investment banker cap on, Morgan Stanley’s analysts would be required to disclose their findings, regardless. Whether or not the Facebook IPO will become a case study for regulatory reform remains to be seen.

Critics will certainly acknowledge that Morgan Stanley may not have handled the Facebook IPO well, but they sure did a great job in shooting themselves in the foot. Even if the investigation clears them of any legal wrongdoing, it does little to repair the damage to its reputation and credibility, especially in the minds of those retail clients who were not privy to the information.

Certainly there were other factors besides Morgan Stanley’s handling of the IPO which sent Facebook’s share price to $31 yesterday. Given the NASDAQ’s technical glitches and unfulfilled orders from Friday, the NASDAQ issued a statement that it would make good claims for compensation. That resulted in a huge sell-off and a 14% loss in the price until the Monday noon deadline; it recovered slightly but still closed 11% lower on the day. Yesterday, investors reconsidered the Facebook valuation once the “selective” communication of the lowered growth forecast became more widespread and at the end of the day, Facebook shares had fallen to $31. Wall Street was mixed at the close, with minimal declines attributed to the spillover effect from Eurozone worries; the SPX500 gained 0.05% while the DJ30lost 0.01% and the NASDAQ dropped 0.29%.

Sentiment on OpenBook’s NSDQ100 is slightly favoring bulls over bears, though the bears are the traders returning profits. OpenBook newcomer yannnora opened a short position yesterday and closed it 24-hours later with a 104% return; the trader’s 17.5% allocation to the NSDQ100 has provided a gain of 9.2%.

More typical, OpenBook trader blazter93 captured a 2.0% gain on a short position, bringing his 11.2% allocation in the index to a fruitful 8.2% gain for him and his 16 copiers. The trader also has another short position just opened, which is just slightly off break-even. For the month, the trader’s P&L has improved to 230.7%, while for the quarter the profit is over 300%.

Copyright 2012 eToro Blog

Note: Past performance is not an indication of future results. This post is not investment advice. CFD trading bears risk to your capital.
| Wednesday, 23 May 2012 13:27
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