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    Massachusetts fines Morgan Stanley $5 million

    Takes legal action over Facebook IPO

    Massachusetts fined Morgan Stanley & Co. LLC $5 million over allegations it disclosed financial details about Facebook Inc. with institutional bankers that it hid from the public ahead of the social media network’s disappointing debut on Wall Street in May.

    Secretary of State William Galvin charged that a senior investment banker at Morgan Stanley, the lead underwriter for Facebook’s $16 billion public offering, conspired to keep lower revenue projections for the company out of US Securities and Exchange Commission filings that are available to the general public.

    But the New York investment firm shared those details with select analysts and other investment bankers, giving them an unfair advantage over retail investors and violating state securities law, according to Galvin.


    “Average investors were at a disadvantage and institutional investors got the inside track,” said Galvin, whose office oversees securities regulations in Massachusetts. “Obviously the concern is that a lot of people bought into this at a very high price.”

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    Massachusetts was the first state to take legal action against an investment bank involved in the troubled Facebook IPO when it fined Citigroup Global Markets Inc. $2 million in October for releasing confidential information about Facebook during its public offering.

    The Morgan Stanley fine is “a major black eye” for the investment bank, said Andrew Stoltmann, a securities attorney from Chicago. For a big firm to keep information away from smaller retailer investors is “a cardinal sin of a soon-to-be publicly traded company and its underwriters,” he said.

    Facebook shareholders have also filed suits against Morgan Stanley, the Nasdaq exchange, and Facebook over the IPO.

    Soon after Facebook went public at a price of $38 a share, its stock price fell sharply to a low of $17.55 in September. In recent months, the stock has started to climb again, and on Monday it closed at $26.75.


    The free fall that followed Facebook’s IPO suggested insiders had knowledge the public did not, said Galvin, whose office is also investigating the actions of other banks involved with Facebook such as Goldman Sachs and J.P. Morgan.

    Morgan Stanley has agreed to pay the Massachusetts fine but has not admitted to any wrongdoing. “Morgan Stanley is committed to robust compliance with both the letter and the spirit of all applicable regulations and laws,” the company said in a statement issued Monday. Galvin has jurisdiction over Morgan Stanley because the New York firm does business in Massachusetts and because it signed an agreement with the state in 2003 that laid out rules governing the interaction between investment bankers and financial analysts. The deal was the result of a $1.4 billion multistate settlement with big investment firms over massive investment fraud.

    In this case, Massachusetts charges Morgan Stanley violated that agreement when a senior investment banker allegedly orchestrated Facebook’s handling of data that would probably not be well-received by the investment community. That data: Annual revenue could be lower since the company was having difficulty selling advertising on mobile devices, which Facebook members were turning to more often to access their accounts.

    The state charges the investment banker, who is not named but described as a senior employee in Morgan Stanley’s Menlo Park, Calif., office, directed a former Facebook executive to distribute that information only to select analysts who followed the company, and not to the broader investing public.

    While the $5 million fine may send a message, it is hardly going to hurt Morgan Stanley, said John Coffee, director of the Center on Corporate Governance at Columbia University Law School.


    “That’s not the bonus for two employees there,” he said.

    ‘Average investors were at a disadvantage.’

    Still, Coffee said, the action reinforces Massachusetts’ image as an aggressive enforcer of securities law, and shows that the state will go after even minor infractions.

    Michael B. Farrell can be reached at