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The widely anticipated Facebook IPO has turned out to be a debacle for its lead underwriter Morgan Stanley (MS - Analyst Report). The underwriter is now facing a deluge of lawsuits filed by investors, accusing it of giving misleading statements regarding Facebook’s (FB - Analyst Report) revenue growth. The debacle led to about 16% slump of the shares of the social networking giant since the day of listing.

The investors, seeking a class-action lawsuit, alleged that Morgan Stanley and a host of other underwriters were aware of Facebook’s severe and marked reduction in revenue growth during the IPO marketing process. The underwriters deliberately chose to divulge this information only to its top clientele instead of the general public.

This was reflected in the feeble performance of the Facebook shares, resulting in losses amounting to about $2.5 billion for the small investors.

The investors have also accused other underwriter’s like JPMorgan Securities, a wing of JPMorgan Chase & Co. (JPM - Analyst Report) and The Goldman Sachs Group, Inc. (GS - Analyst Report), along with Facebook CEO Mark Zuckerberg for the misleading statements.

Behind the Story

Morgan Stanley had allegedly bought around 420 million shares from Facebook, but sold around 480 million shares to the public by short-selling an additional 60 million shares. As Morgan Stanley was aware of downward revenue projections since the IPO, it had short sold the shares and earned millions in profits at the cost of retail investors, who purchased the shares only because of the hype surrounding it.

As the stock price started tumbling, the secret was out to the public; it drew maximum ire from the investors as well as regulatory bodies. According to Securities regulators, if proved guilty, Morgan Stanley will have maximum legal liability for the fallout for its misleading disclosure of crucial information as well as fraudulent underwriting of the shares.

The officials at Morgan Stanley maintained that the procedure of Facebook's IPO was in compliance with all the regulations and declined to comment any further.

Conclusion

The Facebook IPO, the most publicized IPO in recent memory, could have proved a crowning moment for Morgan Stanley. However, it turned out to be a highly controversial legal and public relations disaster for the bank. The bank now faces various lawsuits for fraudulent behavior and its reputation is at stake.

Escalated litigation costs are also expected to significantly impact its financials. Even the share prices of the company will bear the brunt of this fiasco.

Morgan Stanley currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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