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WSJ: These Companies Got the Inside Track on Facebook's Doomed IPO

Illustration for article titled WSJ: These Companies Got the Inside Track on Facebooks Doomed IPO

The proverbial continues to hit the fan over Facebook's IPO. Investors are trying to get their lost money back through the courts and Morgan Stanley are being blamed for all kinds of dubious activities. Now, the Wall Street Journal has confirmed the names of companies who Morgan Stanley tipped off about Facebook's doomed offering.

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Staff from Morgan Stanely—acting on information from a Facebook executive—decided to warn a small, select number of large companies off from the IPO. From the Journal's article:

"Capital Research & Management wanted to buy into the Facebook Inc.initial public offering. But days before the IPO, an underwriting bank on the deal warned the big investment firm about Facebook's dimming revenue prospects...

"The Los Angeles firm, armed with information from a May 11 "roadshow" meeting with underwriters and Facebook, along with similar estimates of its own, slashed the number of shares it intended to buy...

"Fidelity Investments was among big clients that were told by analysts or bank sales staff of the declining Facebook financial picture, people familiar with the matter say. The nation's third-largest mutual fund firm expressed frustration to Morgan Stanley about Facebook valuations based on the dimming prospects for the company, the people say."

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All of which is very, very dubious. It will be interesting to see if any other names come creeping out of the woodwork—and how Facebook and Morgan Stanley manage to deal with the continuing saga. Especially Facebook; while Morgan Stanley's actions were undoubtedly unethical, they may well not have been illegal. But if Facebook hid important information about its financial condition from the larger investment community, well, that's how class action lawsuits get won. [Wall Street Journal via Business Insider]

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DISCUSSION

See, this is what I'm wondering; what can you do about this? If I'm having lunch with someone who works at company X. I'm not doing it to probe for information about company X, it's purely innocent. It also happens that I have stock in company X (the other person may or may not know about this). During the meal, the person tells me something bad that would hugely effect the stock of company X.

Am I expected to completely ignore the information and take the stock hit to the face when the official announcement is made? Am I expected to tell the world the information, essentially leak it further (something that's arguably illegal in it's own right, but perhaps technically more fair from an investing perspective)? Am I expected to take the information that I unintentionally happened across by luck or fate and act upon it so I don't take it in the chin but also don't potentially do something legally compounding by spreading the news?

It's a completely different story if I went to that meal with that person with the intent to get insider information. If these large firms were in contact with Morgan Stanley explicitly FOR insider information on FB, then they are absolutely culpable (both Morgan Stanley and the investment firms). However, if the information came from Morgan Stanley completely spontaneously, then I can't honestly blame the actions of those firms.

Now, the people who spread the news without making an official statement to the world, that's a different story. By ignorance or with purpose, he/they did something potentially illegal, or at the least against his employers [stated] policies.