A veteran journalist tells me that now it’s not just Morgan Stanley who is blaming me for the Facebook IPO selective-disclosure scandal–it’s Facebook, too.
Not officially, of course!
Just on background, when folks ask how it could possibly have been fair for Facebook and Morgan Stanley to tell big institutional investors that Facebook was having a lousy quarter but not share this information with smaller individual investors.
As I explained last week. Facebook and Morgan Stanley are saying that the rules governing analyst involvement in IPOs made them do this. And then they note that these rules were the rules created after the research-banking scandal of the 1990s, in which analysts worked closely with bankers on IPOs.
I was one of the analysts keelhauled for that banking-research arrangement, which, for what it’s worth, pre-dated my Wall Street employment by more than a decade.
They keelhauled me, along with a dozen other firms and other analysts, and then they changed the rules.
And so now I’m being blamed for flaws in the new rules–the ones that Facebook and Morgan Stanley say caused them to keep small investors in the dark about Facebook’s crappy quarter.
And the rules are indeed ridiculous and unfair.
The rules apparently allow companies going public to give earnings “guidance” to underwriter analysts and then allow those underwriter analysts (and salespeople) to verbally relay this guidance to their big institutional clients. But the rules apparently prevent analysts and salespeople from putting anything in writing or whispering anything to individual clients. And Morgan Stanley says that’s why it didn’t tell its individual clients about Facebook’s quarter.
Here’s how to fix the situation:
- Allow analysts to publish full research on companies before they go public, as in the UK, and make this research available to everyone. OR
- Remove analysts entirely from the IPO process. Don’t let them talk to the IPO company or big clients, don’t let them produce earnings estimates, don’t let them do anything until the company is public. Then let them write research like everyone else.
Either of those solutions would be fair.
The current system, meanwhile–the one that led to the Facebook selective disclosure disaster–is grossly unfair.