The widely anticipated Facebook IPO has turned out to be a
debacle for its lead underwriter
). The underwriter is now facing a deluge of lawsuits filed by
investors, accusing it of giving misleading statements regarding
) revenue growth. The debacle led to about 16% slump of the shares
of the social networking giant since the day of listing.
The investors, seeking a class-action lawsuit, alleged that
Morgan Stanley and a host of other underwriters were aware of
Facebook's severe and marked reduction in revenue growth during the
IPO marketing process. The underwriters deliberately chose to
divulge this information only to its top clientele instead of the
This was reflected in the feeble performance of the Facebook
shares, resulting in losses amounting to about $2.5 billion for the
The investors have also accused other underwriter's like
JPMorgan Securities, a wing of
JPMorgan Chase & Co.
The Goldman Sachs Group, Inc
), along with Facebook CEO Mark Zuckerberg for the misleading
Behind the Story
Morgan Stanley had allegedly bought around 420 million shares
from Facebook, but sold around 480 million shares to the public by
short-selling an additional 60 million shares. As Morgan Stanley
was aware of downward revenue projections since the IPO, it had
short sold the shares and earned millions in profits at the cost of
retail investors, who purchased the shares only because of the hype
As the stock price started tumbling, the secret was out to the
public; it drew maximum ire from the investors as well as
regulatory bodies. According to Securities regulators, if proved
guilty, Morgan Stanley will have maximum legal liability for the
fallout for its misleading disclosure of crucial information as
well as fraudulent underwriting of the shares.
The officials at Morgan Stanley maintained that the procedure of
Facebook's IPO was in compliance with all the regulations and
declined to comment any further.
The Facebook IPO, the most publicized IPO in recent memory,
could have proved a crowning moment for Morgan Stanley. However, it
turned out to be a highly controversial legal and public relations
disaster for the bank. The bank now faces various lawsuits for
fraudulent behavior and its reputation is at stake.
Escalated litigation costs are also expected to significantly
impact its financials. Even the share prices of the company will
bear the brunt of this fiasco.
Morgan Stanley currently retains a Zacks #3 Rank, which
translates into a short-term Hold rating. Considering the
fundamentals, we also maintain a long-term Neutral recommendation
on the stock.
FACEBOOK INC-A (FB): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis Report
To read this article on Zacks.com click here.