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GMI Ratings Governance Issue | Morgan Stanley

May 23, 2012 | About:

Morgan Stanley is being probed over whether its analysts gave privileged information to clients ahead of Facebook’s initial public offering. Even after supposedly eye-opening events such as the financial crisis of 2008, the banking firm continues having run-ins with regulators.

Morgan Stanley analysts had discussions with institutional investors about the social networking company’s revenue prospects before its IPO on May 17. They advised clients to dial back their expectations, the New York Times reported. Some big institutions did that while others placed large orders, and retail investors clamored. Meanwhile Facebook and its bankers went ahead to price the deal at $38 a share, ending up with the embarrassing result of lower than expected demand, the New York Times said. Facebook shares were trading at $32.06 apiece intraday on Wednesday.

Regulators are investigating. Massachusetts’ Secretary of the Commonwealth William F. Galvin, for example, on Tuesday issued a subpoena to Morgan Stanley in connection with the matter. Investors claimed Morgan Stanley and others misled them in the purchase of the company's stock and filed suit Wednesday, Bloomberg reported.

Morgan Stanley and Facebook didn’t respond to a request for comment within press time.

Obviously it’s too early to know whether Morgan Stanley is guilty in this one. Regardless, it’s astonishing that the bank has managed once again to get into a situation that regulators deem worthy of questioning. The lawsuits have been coming for years and they don’t seem to stop. In April 2003, for example, Morgan Stanley was one of ten investment firms to collectively pay $875 million to settle allegations that they engaged in practices that maintained inappropriate influence by investment banking over research analysts. Then in January 2005 the Securities and Exchange Commission announced that Morgan Stanley and another firm would have to pay $40 million relating to allegations that they pushed customers to buy stock at higher prices in the aftermarket of IPOs.

Morgan Stanley has had its wrist slapped too many times to be a plausible victim of justice. The financial services firm agreed to pay $102 million to Massachusetts homeowners after the state’s attorney general’s office investigated its securitization and financing of subprime loans, the regulator said in June 2010. The Financial Industry Regulatory Authority said just this May that it fined Morgan Stanley $1.75 million and $604,584 in restitution for the way they sold leveraged and inverse exchange-traded funds to their customers. These are only a couple examples from a list that’s so long, you could make a chart with it.

Despite the continuing regulatory issues, Morgan Stanley’s stock price has recovered nearly 41% from its low in October 2008 to trade at $12.92 per share intraday Wednesday.

GMI gives the firm an F on its corporate governance. Morgan Stanley’s financial statements reflect an AGR score of 17, indicating higher risk than 83% of comparable companies. The AGR was a 1 in June 2009.


Region: North America

Industry: Financials

Sector: Investment Services

Market Cap: $29,567.7mm (Large Cap)

ESG Rating: F

AGR: Aggressive (17)

Rating: 3.6/5 (7 votes)


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