Morgan Stanley Admits Selective Disclosure of Facebook Projections to Privileged Investors - Says with a straight face: Its Standard
We intended to write about why Facebook's, and it's underwriters' disclosure of downward revised projections to select insitutional purchasers in Facebook's IPO is not only wrong, but illegal. We will still do that shortly. However, the facts as to what happened, that have been set forth in our Facebook securities fraud Class Action Complaint have come mostly from third party accounts, like Reuters, the New York Times and the Wall Street Journal....and Henry Blodget's Business Insider. Thus, we have been digging for more reliable sources from Facebook itself....mum is the word there...and the underwriters...more silence.
Today all that has changed. In a CNBC EXCLUSIVE interview today on CNBC’s “Closing Bell with Maria Bartiromo”, Facebook's lead underwriter, confirms those reports, but claims that it is all standard operating procedure! Retail investors are cut-out of those disclosures. Morgan Stanley Chairman & CEO James Gorman infers in the interview that the SEC has looked at this practice and has given its blessing:
BARTIROMO: LET ME SWITCH GEARS AND ASK YOU ABOUT THE ANALYST CUTTING ESTIMATES. I RECOGNIZE THAT THERE WAS AN AMENDED -- AN AMENDMENT TO THE S1 AND ALL OF THAT INFORMATION WAS RIGHT THERE. BUT YOUR ANALYSTS CUTTING ESTIMATES ALONG WITH THE OTHER ANALYSTS ON THE ROAD SHOW, A LOT OF PEOPLE SAYING THIS IS A CONFLICT OF INTEREST AND THEN THE NUMBER OF CLIENTS ACTUALLY RECEIVED THAT INFORMATION. WERE YOU SELECTING YOUR BEST CLIENTS TO TELL THEM WE’RE CUTTING ESTIMATES HERE? HOW DID YOU DECIDE WHO TO TELL THE INFORMATION IN TERMS OF CUTTING THOSE ESTIMATES?
GORMAN: ABSOLUTELY NOT. FIRSTLY, THERE IS JUST SO EVERYBODY UNDERSTANDS WHAT THE PROCESS IS, AFTER YOU RECEIVE AN S1, IF THERE IS A CHANGE IN WHAT THE PERFORMANCE OF THE COMPANY IS BELIEVED TO BE, AND [Reed Kathrein Comment: Gorman know he is sumbling here into forbidden territory...he has been prepared by his attorneys and told not to admit anly obligations. He is about to admit that if there is a change you must disclose...but better to litigate that issue and not admit it. So he drops it and starts talking about how ethically Facebook acted by inserting an opaque disclosure that had everyone scratching their heads.] IN FACEBOOK I THINK ACTING WITH GREAT INTEGRITY ALERTED THE MARKETPLACE RELATING TO MOBILE ADVERTISING, WHAT THE NUMBERS, WHAT THE DIRECTION WAS, TRAJECTORY FOR Q 2 OVER Q1. AND WE PUT OUT AN AMENDMENT TO THE S-1 AND THAT WENT TO EVERY INVESTOR. AND BASED UPON THAT AND BASED UPON THE COMPANY MAKING THAT ALERT, I SAW AND I'VE GOT A LIST OF OVER 20 NEWS ORGANIZATIONS WHO REPORTED THAT, WHICH INCLUDED, BY THE WAY, CNBC, WHO CAME OUT AND SAID THERE WAS A REVISION THAT WAS FRANKLY A MODEST REVISION TO THE PROJECTIONS FOR FACEBOOK WHICH TRANSLATED INTO AN AMENDMENT [Reed Kathrein Comment--Doublespeak for "We hid the truth in mumbo jumbo." Go ask my friend and SEC advisor Professor William D. Lutz...I certainly will be doing so.]AND SAID DEAR INVESTORS WE KNOW YOU ARE INTERESTED IN THE STOCK, HERE'S THE AMENDMENT. [Reed Kathrein Comment--Meaning "Try to figure this out."] EVERYBODY MAKE UP YOUR MIND. [Reed Kathrein Comment---Meaning, "But our clients get more information to make up their mind than you the poor individual investor which Wall Street has been ripping off over the last decade.] AND THE POLICY THAT WE AND THE UNDERWRITERS OPERATED UNDER, AND THIS HAS BEEN LOOK AT A NUMBER OF TIMES OVER THE YEARS BY THE REGULATORS AND I BELIEVE THE S.E.C. IS THAT THERE IS INDIVIDUAL DISCLOSURE ORAL DISCLOSURE, NO WRITTEN REPORTS TO INSTITUTIONAL INVESTORS INTERESTED IN WHAT THAT PARTICULAR ANALYST SAYS BECAUSE THEY CAN GO TO MANY OF THE COMPANIES PICK UP INPUT FROM A NUMBER OF THE DIFFERENT UNDERWRITERS AND THE POLICY TO DATE HAS NOT BEEN OFFERED THAT SAME INFORMATION EITHER THE ORIGINAL PROJECTION OR THE REVISED TO RETAIL INVESTORS. [Reed Kathrein Comment---I have looked and I don't see the SEC blessing selective disclosure of material projections to those permitted to attend the road shows. If it has, it must be part of the Madoff Affect---"If we think he is one of us then he gets a pass."-----or the revolving door between industry and the SEC. Acutally...to be explained latter...the SEC is particularly concerned about giving projections selectively to those in the roadshows. In any event, the SEC cannot bless violations of Section 11 or 12 of the Securities Act of 1933. That is interpreted by the Courts and can only be changed by Congress. You can see that Gorman knows this is the case because he refers to the revisions in the projections as "modest"---trying to distinguish them from "material", which must be disclosed to everyone under the Sections 11 and 12.]
BARTIROMO: SO DO YOU WORRY, YOU KNOW, YEAH, YOU'VE GOT THE AMENDED S-1 BUT THE AVERAGE GUY OUT THERE, THEY DON'T KNOW HOW TO READ THAT S-1. THEY DON'T KNOW WHAT THEY ARE LOOKING FOR AND THEY ARE SAYING THE BEST CLIENTS OF MORGAN GOT THAT BEFORE I DO. MAYBE THAT'S WHY YOU HAVE MAJOR CANCELLATIONS AND MODIFICATIONS OF THOSE ORDERS.
GORMAN: NO. BUT ALL OF THIS OCCURRED BEFORE. ALL OF THIS WAS DURING THE PERIOD OF THE ROAD SHOW. IT WASN'T AFTER THE TRANSACTION WENT PUBLIC. AND THE DEMAND WAS STILL THERE AT THAT POINT WHEN WE GOT TO THE END OF THE ROAD SHOW AND, LISTEN, THERE WILL BE VARIOUS INQUIRIES AND I KNOW THE SEC AND CONGRESS HAVE LOOKED AT THAT I’VE SAID TO MY ORGANIZING THERE WAS NO NEPHARIOUS ACTIVITY THIS WAS STANDARD OPERATING PROCEDURE. IT'S THE POLICY WE AND ALL OF THE OTHER UNDERWRITERS HAVE OPERATED UNDER WITH RETAIL ORGANIZATIONS AND THERE WASN'T ANY DESIRE TO OBFUSCATE OR HIDE. THIS WAS A STANDARD OPERATING PROCEDURE AND IT WAS IN THE PUBLIC DOMAIN. [Reed Kathrein Comment: I can't say I knew it was and I have been a securities fraud litigator for almost 35 years. But now I agree its public and something needs to be done to correct it. Thank goodness we have Section 11 and 12 of the '33 Act and can address this through class actions or individual opt out actions.]
Well retail investors and smaller institutional investors, there you have it...from the horses mouth. The IPO trough is has no water for you. You get the dry hole.
Join us in correcting this wrong. You can reach us by emailing us here. The courts will be looking to appoint a large investor to lead these cases within the next few months. If you have large losses and would like to move to be the lead the deadline is July 22, 2012.
