Morgan Stanley Fined Over Faulty IPO Practices - Analyst Blog

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Morgan Stanley 's ( MS ) wealth management division - Morgan Stanley Smith Barney LLC - has been fined $5 million by the Financial Industry Regulatory Authority (FINRA) due to its improper initial public offerings (IPOs) practices. Following this negative development and broader market decline, the company's shares fell more than 2% in the intra-day trading on Tuesday and closed at $29.46.

The FINRA alleged that Morgan Stanley failed to supervise the sale of shares to retail customers during 83 IPOs, including those of Facebook, Inc. ( FB ) and Yelp, Inc. ( YELP ). The company neither followed proper procedure nor did it train its sales staff to distinguish between 'indications of interest' and 'conditional offers to buy' while soliciting potential investors.

An 'indications of interest' will lead to purchase of shares only if it is re-confirmed by the investors after the effectiveness of registration statement. On the other hand, 'conditional offers to buy' becomes a compulsory deal in case the investors do not rescind the conditional offer after the registration statement is effective.

Notably, the sales staff at Morgan Stanley often used both these terms interchangeably. This confusion basically arose after the company tried to reconcile different policy practices at Morgan Stanley and Citigroup Inc. ( C ), which had formed Morgan Stanley Smith Barney joint venture (JV) way back in 2009. Morgan Stanley took full control of the JV last year June.

Further, as per the data from Thomson Reuters, last year Morgan Stanley was the world's largest underwriter of IPOs by fees, with a market share of 9.5%. The lapses occurred between Feb 2012 and May 2013. Nevertheless, the company neither accepted nor denied any wrongdoing.

Though the company's spokesperson commented that it remains committed to offering its clients participation in IPOs as per FINRA rules with enhanced policy practices, retail investors might be wary of going to Morgan Stanley to purchase shares under IPOs. It is noteworthy that Morgan Stanley is one of the underwriters for China based Alibaba's U.S. IPO.

Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: C , FB , MS , YELP

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