As I reported yesterday, Morgan Stanley held a firm-wide conference call last night to address its clients’ frustration about the Facebook IPO.I now know exactly what was said on that call.
As a result, I also know exactly how Morgan Stanley is trying to spin the “selective disclosure” problem, in which Morgan Stanley’s big clients got advance word about Facebook’s lousy second quarter and Morgan Stanley’s individual clients and financial advisors didn’t.
On yesterday’s call, I am happy to report, Morgan Stanley did not blame me for its decision to share bad news about Facebook with some clients and not others. (On a conference call the prior day, reportedly, the firm did exactly this.)
What the firm did do was engage in some clever spin designed to mute the outrage.
As it has said before publicly, the firm said it followed standard procedures and rules for IPOs. And, this time, it further explained that these rules prohibit its research analysts from publishing research on IPO companies but allow the analysts to talk to the companies, produce and share performance estimates, and talk verbally with clients.
Morgan Stanley did not comment on the absurdity of these rules on yesterday’s conference call. But it stated them accurately. (As we’ve said, the rules are ridiculous and need to be changed).
And, then, on the conference call, Morgan Stanley moved on to its clever spin job.
On May 9th, the firm said, Facebook filed an amended prospectus with the SEC (true).
This amended prospectus, the firm continued, included “the content of the amended guidance.” (spin)
In response to this “amended guidance,” the firm went on, the firm’s research analyst cut his estimates. (almost certainly false).
In other words, the firm strongly implied, the supposedly secret bad news that Morgan Stanley’s big clients got was available to all clients in the prospectus…in the form of “amended guidance.”
This is, of course, the only thing that Morgan Stanley could say. And it gets at the question that the legal fight will likely hinge on.
The truth is that Facebook’s IPO prospectus did not contain anything like “amended guidance.” In fact, it didn’t include any “guidance” at all. All the prospectus included was a vague new sentence on page 57 noting that users were continuing to grow faster than revenue.
Nor is it plausible that Morgan Stanley’s research analyst cut his Facebook estimates based on the new language in the prospectus, as the firm suggested on yesterday’s conference call.
Rather, Morgan Stanley’s research analyst, along with the 20 other analysts who were reportedly called by Facebook and directed to reduce their 2012 revenue estimates from ~$5.1 billion to $4.8 billion, most likely cut his estimates based on the very explicit guidance received on this phone call, rather than on the vague new sentence in the prospectus.
To this former securities analyst, at least, the difference between 1) the new, vague language in the prospectus and 2) being called and told by the company’s CFO’s office to reduce revenue estimates from one very precise number to another very precise number is night and day.
The former is just a vague and mildly unnerving sentence buried in a prospectus.
The latter is truly “amended guidance.” (Or, more accurately, “reduced guidance.”)
But it seems Morgan Stanley will take the position that the two were exactly the same thing–and, therefore, that all Facebook investors had access to the same bad news.
They weren’t the same thing, of course.
And the difference between the explicit bad news that Morgan Stanley’s big clients got and the vague new sentence on page 57 of the prospectus that most of Morgan Stanley’s financial advisors and smaller clients got is critically important.
But it’s no surprise that Morgan Stanley is spinning them as the same thing. They have to! Otherwise this is a clear and egregious case of selective disclosure.
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