Morgan Stanley Made Money on Facebook Share Drop
Facebook CEO and founder Mark Zuckerberg rang the opening bell remotely, from company headquarters in California. (Zev Nikolla/Facebook / May 18, 2012)
A person close to the deal puts the trading profits at $100 million, still a big payday.
To anyone outside of Wall Street, this whole arrangement seems like a giant conflict of interest.
Just days before the IPO, Morgan agreed to allow Facebook to sell more shares than it originally proposed. Morgan also set the IPO price higher than originally expected.
That, in part, set the stock up for the fall, creating the trading gains for Morgan.
Wall Street, of course, doesn't see it that way. In fact, Facebook's own prospectus says that the underwriters "may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position."
Regulators don't seem particularly concerned with the practice either.
Walter Van Dorn, a partner at law firm SNR Denton who spent seven years at the Securities and Exchange Commission in part monitoring IPOs, says that the practice of over allotment in IPOs was well-known.
"The SEC doesn't see it as a conflict of interest," says Van Dorn. Indeed, it's unlikely that Morgan was rooting for Facebook's stock to drop. The deal has likely been a big hit to the reputation of its tech banking team, which had generated huge fees for the firm.
Still, what's clear is that there is a lot that's not understood about the way Wall Street sells shares to the public. Even among Wall Streeters, the fact that underwriters can profit from IPO stock drops is not widely known.
The Facebook deal is shedding some light on the process, and hopefully dispelling the myth that IPOs are the last guaranteed way to make a quick buck on Wall Street. That's long overdue.