Facebook (FB), Morgan Stanley (MS), and “Dumb Money”

For an industry that has ongoing and enormous reputational issues, the manner in which the high profile Facebook (FB) 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 Street utilizes the caste system in dealing with clients, this Facebook underwriting is proof positive. 2300 pages of financial regulatory reform and they missed this? Can you say joke??!! 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., 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 (MS) 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?”

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

Visit: Sense On Cents

2 Comments on Facebook (FB), Morgan Stanley (MS), and “Dumb Money”

  1. Very provocative article. To answer your question “Who is the dumb money”, Morgan Stanley and Goldman Sachs are the smart money. They own the SEC and Congress and know they will never be held accountable, so why not do whatever you want? It’s not like they ever had ethics to begin with and now that there is no regulation of the big firms, it would be foolish not to run the scams as fast and as far as possible.

  2. What baffles me is that these brands have ANY individual clients left after consistently demonstrating their lack of care and concern for individual investors.

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