Monday, August 27, 2012

Morgan Stanley Mutual Funds Invest Heavily in Facebook -

Investors Pay Big Fees For That Kind of Expertise

The big story with respect to Facebook so far is the collapse of the stock price following its initial public offering.  This was not unexpected, after all the company raised billions of dollars on hype and hope, and really did not have a plan to utilize the money.  The main purpose of the IPO was to set up a public market for the shares so founders and early investors would have a way to cash in their shares.

Somebody forgot to tell all of this to Morgan Stanley, the investment bank that was a significant participant in floating the shares in the market.  Morgan Stanley made a nice piece of change in the deal.

Morgan Stanley had a crucial role in lining up orders for Facebook as the social-media company prepared to go public. It helped advise Facebook executives to increase the size and price of the IPO, despite warnings the company was making about its profit outlook. The New York securities firm, which declined to comment, took in $200 million in underwriting fees and trading profits, according to regulatory filings and people involved in the deal.

So Morgan Stanley was obviously pretty knowledgeable about the shares and the risks they carried. 

Well, maybe not.

New data show that eight of the top nine U.S. mutual funds with Facebook shares as a percentage of total assets are run by Morgan Stanley's asset-management arm, according to fund tracker Morningstar Inc.

Now this obviously raises all sorts of conflict of interest questions, but apparently Morgan did nothing illegal and did not violate any regulations.

Morgan Stanley's funds don't appear to have violated Securities and Exchange Commission rules limiting investments in offerings underwritten by an affiliate. SEC rules allow bank-affiliated mutual funds to participate in offerings in which the bank's investment bankers are advising the company, as long as the fund managers don't buy more than 25% of the deal and they buy the shares from a different bank.

And it may even be the fact that they were able to buy them before the IPO and at a lower price than the IPO price.  Of course none of that washes away the stink from the fact that a large purchaser of the shares also made a huge amount of money in the IPO.  But the problem here is not Morgan Stanley, it is in regulations which allow this sort of thing.  Certainly this part of the SEC rules didn’t hinder a company from making big bucks.

As for the investors, it would be nice to know whether or not they have a gain or a loss in their position in Facebook, but alas, regulations do not force release of that information.  See that would be regulating for the benefit of investors, and that is not what modern SEC regulations are doing.

As for Facebook, the $38.00 IPO price is just a little higher than the current price.  The current price is about $19.00 and change.  And yes for the math challenged, that is about 50% of the offering price.  But don’t worry, the fact that the stock has almost immediately lost half its value doesn’t mean Morgan Stanley has to give back any of the $200 million it made on the IPO. That wouldn’t be right. 

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