“History doesn’t repeat itself, but it does rhyme”: more on Facebook

I was reminded of this famous saying of Mark Twain’s when reading the latest news about the now notorious Facebook IPO.

A prior post described allegations that the lead underwriter,  Morgan Stanley, apparently shared information about Facebook’s flagging prospects with some, but not all, customers before the IPO — a claim of COI that will now be tested in the courts.  In the past few days  a different COI issue has surfaced, with reports that  “eight of the top nine U.S. mutual funds with Facebook shares as a percentage of total assets are run by Morgan Stanley’s asset-management arm [which may be suggestive of a COI  because] Morgan Stanley had a crucial role in lining up orders for Facebook as the social-media company prepared to go public. It helped advise Facebook executives to increase the size and price of the IPO, despite warnings the company was making about its profit outlook. The New York securities firm, which declined to comment, took in $200 million in underwriting fees and trading profits, according to regulatory filings and people involved in the deal.”   As noted by one commentator, “the Morgan Stanley funds’ large stakes raise questions about whether the firm’s role as lead underwriter influenced [the funds’ investment] decisions.”

It should be stressed that no one apparently has proven an improper motive in the purchasing decisions in this instance.   But, as was stated more generally by another commentator: “Institutions that underwrite shares and buy them on behalf of individuals represent another of those too-big-to-fail conflicts of interest that no one seems bothered enough by to actually change. Until, of course, they get burned by one of these deals.”

A famous case in COI history where regulators were able to prove that a bank’s investment advisory business was polluted by other commercial considerations involved HP and Deutsche Bank. In 2003 the Securities and Exchange Commission brought charges against the advisory unit of the bank  where its “investment banking division was working for HP on [a] merger, and had intervened in [an asset management] proxy voting process on behalf of HP.” As stated by the SEC: “This created a material conflict of interest for [the advisory business], which had a fiduciary duty to act solely in the best interests of its advisory clients.”

And looking back further still… nearly ten years before this, one of my colleagues at NYU’s business school had penned a case study that eerily prefigured the HP/Deutsche Bank matter, for use in discussing how external forces could impact investment decisions made by fiduciaries.  Perhaps it was a work of pure imagination (I never asked him) but even at the time it seemed to have the ring of truth – and does even more so today.