Kings of The Courts
Morgan Stanley and the “Botched” Facebook IPO
By; Chris Karol 5/15/14
Dad tells me he’s relying on his social security along with earlier investments at Morgan Stanley for a comfortable retirement. This seems strange to me given his political views. Something just doesn’t sit right. For the first time in my life, I’m actually concerned about his financial future. I'll tell you just for the record why I am concerned. First of all, it's hard for me to understand how he can place so much faith in these institutions while going on-and-on about the ills of society the way he does. Does he not see the connection? Perhaps it’s none of my business, but it bothers me. So I looked into it.
First thing that popped up was the New York Times, James B. Stewarts Business Day Column of May 9, 2014. So that’s where I started. Stewart's Column, titled "In Silicon Valley, Morgan Stanley Reigns" passes itself off as another cheery headline. Reading into it however, it appears to me that botching Silicon Valley IPO’s is Morgan Stanley’s specialty. The story begins with Morgan Stanley reeling from their “botched” Facebook IPO, seemingly down for the count, struggling to regain consciousness. The blood-bath adequately hooking the reader until Stewart pulls a late 180 out, landing Morgan Stanley firmly back on it's feet, and back on top of the pile. Stewart’s column serves up the bitter pill of public resentment and anger towards big institutional investment firms in a gourmet shit-sandwich. Expecting the general public to eat it.
Contradictory headlines are great indicators for signaling bullshit. Manipulating markets can be done in a simple fashion, buying or selling shares. We all witnessed this during the “Flash” crash of 2010. A much simpler method involves placing a well-timed bit of news where it’s most likely to spread through the right channels. A press release on the AP Newswire usually does the trick…if you can get away without making it look too obvious. It's still done the old fashioned way as well, by asking absurd questions in shareholder meetings that might sound reasonable to an outsider but have no basis in reality. Questions can be designed to raise concerns or excitement among outsiders. Stewart begins his article quoting one of the Facebook IPO’s harshest critics, Wall Street analyst Henry Blodget. Intentional or not, Blodget, co-founder and editor in chief of the website Business Insider, provided the bread that made this shit palatable.
The table had already been set. By December 20, 2012, most small investors in the Facebook IPO had been flushed out of the game. Many believed life as we knew it was about to end. Facebook shares, showing a glimpse of improvement from their all time low of $17.73, were trading at $27. Well below their opening value of $38. This represented a 27% overall decline from Facebook’s IPO price. The remaining small investors, hanging on by the skin of their teeth, had endured months of bad press, watching their investment disappear right before their very eyes.
This was their chance to cut their losses. CNN had reported the previous day that Facebook’s No. 2 CEO Sheryl Sandberg had just unloaded 310,000 shares. Other early employees and investors had also taken advantage of their chance to sell–including Peter Thiel, the company’s first big investor, and company co-founder Dustin Moskovitz. Zuckerberg played the role of the stoic Captain, holding fast to his theme of social-responsibility while going down with the ship. CNN reporting “he doesn’t plan to sell Facebook shares until at least September 2013." In other news, Henry Blodget’s headline for his Business Insider story posted on December 20, 2012 screamed; “REVEALED: The Full Story Of How Facebook IPO Buyers Got Screwed.” Facebook hysteria appeared to be finished. All of this was predicted well in advance of course by the Weekly World News which had scooped everyone on October 1, 2012, reporting “Facebook Will End On May 15th, 2013”. Facebook stock continued to stumble through the next 1st Quarter of 2013 leaving many to wonder, what was going on in Menlo Park? Had the Harvard kid run his course? Could this be the vindication so desperately sought by those eager Facebook fans that had bought into the hype, only to wake up not knowingwhat hit ‘em? America loves to crucify its hero’s. Mark Zuckerberg appeared to be next in line.
Contrary to public opinion, but not surprisingly, Facebook’s 2nd Quarter results from 2013 revealed a different story. Reporting a 53% increase in revenue over previous years results, with a 35% decrease in costs & expenses, Facebook achieved a plus 31% GAAP operating margin for the second quarter of 2013, compared to their minus 63% operating margin reported for the previous year. Apparently they knew what they were doing all along. And they had been busy. On the heels of their 2nd Quarter results, came the complete overhaul that had been in the works for monetizing Facebook’s mobile delivery platform.
So why did Facebook insiders sell prematurely? Who knows for sure but it seems to have all gone according to plan. Sandberg was on a pre-arranged trading plan leaving her no control over the specific timing of her sales while avoiding accusations of insider trading. Any losses Facebook’s insiders may have incurred where surely offset in-part by the corresponding decrease in capital gains. Meanwhile, the new-school billionaires dabbled in philanthropy, Zuckerberg donating $500 million in stock to the Silicon Valley Community Foundation, while Sandberg tried her hand, donating roughly $10 million worth of her shares to an undisclosed recipient. They seemed to be doing just fine. But people were pissed. This shit was hard to swallow. Meanwhile, Morgan Stanley had gotten a tidy return on the Facebook IPO for their clients by successfully exploiting Facebook hysteria. The decoy was a simple handwritten script, written by Morgan Stanley’s CEO James Gorman.
The opening act began on May 18th 2012. Morgan Stanley launched the Facebook IPO with an initial public offering of $38. Despite all-time record trading volume for an IPO, Facebook stock immediately tanked, reaching an all time low on September 4th of $17.72. Large Investment firms were then in position to screw the average mom and pop retail investors and trader, buying back shares at greatly reduced prices. Institutional investors could weather the storm. Patiently waiting to purchase Facebook shares for pennies on the dollar. A few well-placed bits of bad news could easily maximize profits, shaking out the few remaining nervous investors. Whoever was left standing at this point, then had the opportunity to purchase deflated shares before the dust settled and price rose again.
It's common knowledge that financial markets are really good at taking money from inexperienced, outside traders & investors. One could argue this provides liquidity for the markets and is thus good for the economy. Regardless of one’s opinion, it doesn't take a rocket scientist see cause and effect from this type of insider buying and selling activity. This can be seen in the historical price & data charts. When Inside trading volume spikes, it can be seen as good indication that stock prices are about to move. Outside traders will typically attempt to jump on the bandwagon. A few retail investors and traders might actually survive the ride. However, most of these small players get shaken off like fleas. It’s an Insider’s game. There are rules of course. But Insider trading is legal and commonplace. For example; Nolan Pearson posts on May 9th, 2014. "Insider Selling: Morgan Stanley Insider Sells 33,864 Shares of Stock". If one were to simply scan that headline it could easily be presumed that this Morgan Stanley insider knows something we don't. A logical assumption could be that the Insider is selling and getting out to save their ass. But that would be illegal and far too obvious. Reading furtherhowever, Pearson reported Deutsche Bank maintaining a "hold" rating for Morgan Stanley with a target price of $33, while Morgan Stanley raised their target price to $32. Could Morgan Stanley be hedging their bets? Against what?
Inside buyers and sellers are prevented from buying and selling their stock within a six-month period. You would think this rule is in place to level the playing field for private investors but it really doesn’t. In effect, the six-month rule simply provides inside buyers and sellers with a clear deadline as to when they can get back in the game. Until then, institutional investment firms have ranks of executives on the line, ready to exercise their stock options, should they be called upon to do so. So, did this Morgan Stanley insider simply make a bad call or was he just taking one for the team? Barclay's apparently played along as well, raising their price target on Morgan Stanley from $28 to $33, and gave an equal-weight rating on Morgan Stanley stock. Equal-weight rated funds and/or stock portfolios can encourage higher trading volume and typically have higher trading costs than market-cap weighted index funds and stock portfolios…meaning Barclay's, all bets aside, stood to rake in lots of cash from the general public with high trading volume and brokerage fees. Sounds like a win-win for the banks and investment firms. Pearson’s post went on to mention that thirteen analysts issued hold ratings, twelve analysts issued buy ratings, with only two analysts (red herrings or suckers) reporting sell ratings. Don’t tell me, I'm guessing Morgan Stanley's stock went up.
So, was the Morgan Stanley insider an idiot? Desperate for a million bucks perhaps? Or maybe just doing his job? Hard to say for sure but that last scenario could help to explain why corporate CEO and Executive salaries are so out of control. These people have to carry their companies on their backs. You'd think they were either martyrs or unfaithful employees until you realize that this is actually just part of their job description. Poor guys are so misunderstood it’s no wonder they're jumping off buildings.
But lets really pick James Stewart’s New York Times article apart. If you read between the lines it's disgusting and makes a complete mockery out of the general public. The article opens with Morgan Stanley playing the fool. The "botched offering" making " Morgan Stanley's vaunted technology investment banking team look[ ] as if it were down for the count" Sounds like a compliment wrapped in an insult coming from a Goldman Sachs guy. But for every loser there has to be a winner.
You can almost hear the violins playing for Morgan Stanley in the article’s next paragraph. The Times would have you believe the winner of that round was Goldman Sachs. A Goldman asset manager even plays it cool (almost apologetic) being quoted saying "I would imagine that Goldman will be the underwriter of choice for tech companies in the near future" Wow, what a pussycat. You'd think Morgan Stanley was finished but WAIT! Facebook’s stock actually rebounded and Goldman’s Twitter IPO had since fallen off from its opening at $45.10 on Nov. 7, 2013 to its current level near $33. Oh well, people make mistakes, what can you say? More on that later.
Meanwhile, fast forward to the end of Stewart’s article. Suddenly the Goldman pussycat rescinds his prior insults and concedes his early prediction, being quoted saying "I guess it shows that time heals all wounds. Facebook was a learning experience for Morgan Stanley and since then, they've embraced their big distribution network of retail brokers. That's an advantage that Goldman doesn't have." Good lord, that almost sounds like an advertisement for Morgan Stanley coming from a Goldman Sachs guy. What a sport! Certainly makes up for any slanderous effects caused by his previous statements. Humble pie at it's finest.
And let’s not forget that "despite dire predictions post-facebook, Morgan Stanley has been involved in 47 technology public offerings with a total value of $23.4 billion (JPMorgan Chase is second by dollar value and Goldman Sachs third.)" So lets get this straight: Morgan Stanley was finished according to the news reports, yet had lines of new IPO customers streaming in the doors. Sounds more like an IPO franchise than a failing swap shop.
Here's where Morgan Stanley begins to demonstrate their true genius. Morgan Stanley's West Coast Technology leader gets tapped to deliver the moment of truth, cloaked in a Rudyard Kipling poem. This is brilliant.
“"We knew that staying focused on delivering for clients was more important than ever given the volatile market [… ]. While the bad press was painful, he cited to colleagues the Rudyard Kipling poem "If," which begins,
“If you can keep your head when all about you
Are losing theirs and blaming it on you.””
Jeez., how could anyone not feel sorry for those poor folks at Morgan Stanley? Poetic justice at its worst. The article then wraps up with Morgan Stanley high-fiving and slapping each other on the back as they dance on the graves of all those rookie traders and retirement funds they just destroyed;
…""Others said that rehabilitating Morgan Stanley's reputation took a sustained effort. Things were so bad in the weeks after the Facebook offering that the firm's chief executive, James Gorman, went on CNBC to defend the firm's role in the deal, and told employees in a webcast that they "should be proud of the job your colleagues did."" Read; We crushed you guys-referring to Morgan Stanley’s competitors- Slick.
Finally, Morgan Stanley shows their true colors and just flat out brags; “A former executive involved in the effort, who did not want to be named discussing former colleagues, Read; Got out while the gettin was good
... recalled: "It was a media tidal wave ...of cash I presume?
...None of us were prepared for that. Our tech guys were shaken and bruised. Can you blame them? The whole world was pointing at them. Like they care. If it was that bad, why weren't they fired?
Our competitors were aggressively bad-mouthing us. What about the good sport from Goldman Sachs?
Henry Blodget went on TV criticizing us, beating the drums. Beating the drums for who?
I spent a lot of time with clients, reassuring them, explaining that Morgan Stanley had acted properly.” Many of whom where most likely victims in this whole deal, why else would they need reassurance?
You'd think that would do it, but no. Morgan Stanley's chief executive had also sprayed a protective ink-screen for the corporate squid to exit stage left and disappear undetected. This final touch tactfully placed via Reuters on May 6th, just 3 days prior to Stewart’s NY Times article. The Reuters ink-screen begins as follows; "NEW YORK, May 6 (Reuters) - Morgan Stanley Chief Executive James Gorman said on Tuesday that he does not believe more bankers should have gone to jail for the financial crisis." Read: Those guys got away with it so please don't send us to jail if we get caught
… "Bad judgment, incompetence, negligence, greed: these might be socially unacceptable, lead to a lot of personal embarrassment and potential financial ruin, but they're not criminal offenses," Gorman said in a Q&A with the financier and former journalist Steve Rattner at the New York Ideas event.” Really? So if a crooked court system exercised bad judgment attempting to hold you accountable for the benefit of humanity… but was incompetent, failing to lock you up, thereby neglecting its duty to protect and serve… but had greedy bastards who let you walk, thereby allowing you to avoid personal embarrassment and potential financial ruin…then justice would be served and you wouldn't consider that a criminal offense? Gorman's statement almost makes him sound like some sort of humanitarian.
…"Gorman went on to say that in the few cases where people were proven to have broken the law, such as Bernard Madoff's Ponzi scheme, culprits were jailed" Perfect! Red Herring or fall-guy? You decide.
…“"Simply taking people to jail for messing up in their jobs, you'd be locking a lot of people up in corporations and outside,"he said.” Is that a tacit admission of guilt?
…"Gorman did not specifically cite recent moves by the U.S. Department of Justice to prosecute banks on criminal charges" DOH! Let’s not bring that up!!
…"A former securities lawyer and consultant who took over as CEO of Morgan Stanley in 2010, Gorman also said the government should not have repealed Depression-era laws that kept securities underwriting and trading separate from commercial banking." Read; I'm obviously a financial wizard so listen to me. Why would you wanna do that? It's not like any new financial instruments have ever been developed since the depression-era. And besides, it's not our fault, blame the government!
…"The laws, part of the Glass-Steagall Act, were rolled back over several years, culminating with legislation at the end of the 1990's that allowed the creation of Citigroup Inc. By 2009, the U.S. government had rescued Citigroup three times because of losses it suffered in the financial crisis." Shooots!! Perfect excuse to print more money out of thin air. See how well deregulation works? Think of all the wealth that was created printing up money to bail out Citigroup. We should do this more often eh? Who cares if nobody wants to buy US Treasury bonds when the US government will sell practically anything at rock bottom prices, even if doesn’t belong to them. State lands, Birth Certificates, you name it. US financial institutions get first dibs on the cash, effectively inflating the values of our underlying assets making us all uber rich, while simultaneously boosting inflation, driving down investment yields and depreciating the value of the dollar by the time it reaches the consumer. If we drive interest rates low enough the Fed will even stop printing money. We can take all the money and stop the presses! Mom & Pop will be broken and bankrupt. Then we can buy everything back for pennies on the dollar. The US Government can then figure out how to fix it, sticking taxpayers with the tab while we "help" people out of their difficult financial situations. We'll call it ... Quantitative Easing, sorta like ramming a fire-hydrant up the American taxpayers ass.
Stewart completes his vile concoction, with a squishy piece of white bread. Referring to Henry Blodget once again, stating, "(he) seems to have softened his tone", quote; ““Morgan Stanley is a great firm. I never had any question about that.” Facebook,” he added, “was priced very well given demand at the time.” But, he said, “Big institutional investors got very important information that little investors didn’t get. That’s undeniable. Morgan Stanley said they followed the rules to a T, which may be true, but in that case, the rules are ludicrous because small investors didn’t get the same information.”” Choke it down suckers. That’s all you get. For those who got taken for a ride on the Facebook IPO, it was far too late to do anything about it. Beaten and confused, vindication was about the best they could hope for.
“Justice” was served when a Massachusetts court finally came up with a verdict on the case. For the Estimated $500 million of losses incurred on the Facebook IPO, Morgan Stanley was fined $5 Million Dollars. Gorman deserves a promotion!
It’s not over yet. Morgan Stanley’s CEO James Gorman continues to blow smoke up the regulatory ass while addressing his clients. A recent CNBC article proclaiming; Investment Banking is Over”. Makes me wonder what’s next?