For an industry that has ongoing and enormous reputational issues, the manner in which the high profile Facebook underwriting was handled is a clear indication that Wall Street has learned very little over the last few years. Those in the industry can point to the fact that selective disclosures during an IPO process are not illegal. That is a pathetic statement but one which far too many will utilize to justify — or I should say, rationalize — horrendous business decisions. The WSJ alludes to this reality in writing, Some Big Firms Got Facebook Warning,
It is one of Wall Street’s best-kept secrets: Securities firms are allowed to selectively confer with favored large investing clients about crucial information as they prepare IPOs. Wall Street firms, for their part, say they give certain information to big clients because the clients pay for this type of data. It is typical in an IPO for analysts or sales staff to give certain information to clients, they added. But that usually doesn’t apply to small investors.
If anybody was ever looking for evidence that Wall Sharing utilizes the caste system in dealing with clients, this Facebook underwriting is proof positive. But it is legal so it must be ok, right? Really? I don’t think so.
At any other time, such “selective disclosure” violates federal securities law, which requires companies and Wall Street firms to publicly disseminate any information that could move share prices. Securities law prevents analysts at banks that underwrite large IPOs from issuing research reports to the public until 40 days after the shares begin trading. Some securities lawyers urge that new rules be put in place to prevent this uneven information flow. “Analysts should not be giving opinions about the IPO at the same time their firms are acting as underwriters. They should not be giving information that’s not in the prospectus to favored clients,” says securities lawyer Jacob Zamansky, who represents investors in securities cases. He isn’t involved in any Facebook cases.
Sharing material information with certain high profile clients only to let other customers and the “dumb money” individuals fend for themselves is quite a way to run a business.“Dumb money”, you say? Yep, dumb money, as referenced by the WSJ,
The lead underwriters, which include Morgan Stanley, Goldman Sachs Group Inc. (GS), and J.P. Morgan Chase & Co., set the best price based on demand they saw for the shares last Thursday night when the price was set, say people familiar with the matter. In this case, some of the demand was coming from what on Wall Street is sometimes called the “dumb money”: individual investors looking for a piece of a company that many use every day to connect with friends and others. In low-profile IPOs, 10% to 15% of shares typically are allocated to individuals. In this case, individuals received roughly 25% of the IPO—big for such a high-profile deal.
I have no idea why individuals would want to play in an IPO that encompasses so much hype. That said, in regard to the “dumb money”, I would ask those on Morgan Stanley’s syndicate desk what they make of the fact that overall volumes across equity exchanges are down approximately 50% over the last three years. Did they factor that reality into their equation in determining just how deep their real book was for this Facebook underwriting? With the Facebook stock down 16%, lawsuits pending, and the Morgan Stanley franchise value having just taken an enormous hit, I would ask James Gorman and team at Morgan Stanley, “who is really the dumb money here?” Navigate accordingly.Larry Doyle ISN’T IT TIME to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook? I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.
updated May 24, 2012
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