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Facebook Disappointments

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Everything about the Facebook initial public offering was disappointing. This week's action by the Massachusetts securities regulator is no exception. Massachusetts entered into a $5 million settlement with Morgan Stanley, the lead underwriter of the Facebook IPO. The basis for the settlement was Morgan Stanley's alleged violation of the terms of the 2003 Global Research Analyst Settlement. The 2003 settlement--entered into with the Securities and Exchange Commission, the New York Attorney General and other regulators--involved research analyst conflicts of interest at ten Wall Street firms. There were concerns that research analysts were doing the bidding of investment bankers.

As part of the settlement, the firms agreed to a number of undertakings that fundamentally changed research analysis about companies. In an unfortunate instance of backdoor rulemaking, the regulators changed the industry's regulatory structure without going through the procedures required for agencies conducting rulemaking.

Morgan Stanley allegedly broke the undertakings it agreed to in 2003 when the investment banker managing the Facebook IPO apparently got too involved in the company's discussions with research analysts. As a result of those discussions, research analysts modified their forecasts for Facebook revenue downwards. Regardless of what one thinks of the 2003 settlement, an investment banker's attempt to get updated information to research analysts so they could appropriately downgrade their revenue forecasts in advance of the IPO does not seem to be the type of scenario the settlement was intended to cover.

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Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute


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The Manhattan Insitute's Center for Legal Policy.