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Morgan Stanley Chief Defends Facebook Role

Arash Massoudi and Telis Demos in New York, Financial Times

James Gorman, Morgan Stanley chief executive, has defended his bank’s performance as lead underwriter on Facebook’s public offering, despite waves of criticism from investors and a potential legal review of the deal’s marketing.

Justin Sullivan | Getty Images

Mr Gorman, in comments to Morgan Stanley employees, advised them to be ”proud of the job your colleagues did” and urged them not to judge the quality of the deal “based upon what happened over a couple of days”.

Mr Gorman is set to appear on CNBC television on Thursday morning, when he is expected to address the deal publicly for the first time.

“There are so many lawsuits now, and it’s gone viral, that [Mr Gorman] has to say something,” said Scott Sweet, senior managing partner at IPO Boutique, an investor advisory firm.

Facebook’s poor trading performance since its IPO two weeks ago, exacerbated by a software trading glitch on Nasdaq the day it listed, together with scepticism about its business model, have tarnished what was meant to be a historic debut.

Facebook shares fell a further 2.3 percent to $28.19 on Wednesday, a fresh low since trading began on May 18. They were sold to investors at $38, valuing the social network at $104 billion, compared to Wednesday’s $77.2 billion.

The 26 percent fall below the offer price is haunting the social networking industry, sapping demand for shares in other recently debuted internet companies and triggering sharp declines in companies ranging from Zynga to Yelp. An IPO of another internet group, Kayak,has been delayed.

Morgan Stanley’s role in the deal’s aftermath has been in the spotlight after a top state securities regulator in Massachusetts subpoenaed the bank to determine whether it had shared its analyst’s lower forecasts for Facebook’s growth days before the offer to selected investors.

Morgan Stanley said it followed the normal procedure for IPOs, which allows verbal communication between investors and analysts. Facebook’s slowing growth was also widely cited in the press, people close to the bank have noted. Mr Gorman said there was “no nefarious activity” in the deal’s marketing.

Mr Gorman’s comments, said privately at a regular morning meeting webcast to the bank’s employees, were first reported by Dow Jones.

A string of young internet companies, which recently took their shares public, have suffered since Facebook’s debut.

Zynga, a games developer that derives much of its revenues from operating on the Facebook platform, has lost 29 percent and has declined 41 percent from its opening price when its shares began trading in mid-December.

Yelp, the internet-based reviews service which took its shares public in March, has fallen 22 percent since the Facebook debut. Shares in Renren, the Chinese social network, are also down 27 percent.

Kayak, a travel website, will continue watching market conditions rather than setting a date for its own Morgan Stanley-led $50 million IPO as had been anticipated this week, according to people familiar with the deal.

There are fears that the turn of sentiment against Facebook has spooked the broader market, particularly retail investors who previously favoured the sector.

“There is certainly a market sentiment backlash against internet companies, but Facebook underwriters [also] overestimated demand and issued too many shares,” said Michael Pachter, analyst at Wedbush Morgan.

LinkedIn, the business focused social network, is down 6.5 percent since the day Facebook began trading and Groupon, the online coupon seller, is off by 11 percent.

Some investors have viewed this as an opportunity to buy shares of these two companies, which have exceeded growth forecasts in recent quarters.

“The market is inefficient right now because a lot of retail investors are spooked. This is an opportunity to make money,” said Chris Baggini, portfolio manager at Turner Investments.

Analysts also attributed falling share prices of recently floated internet companies in part to investors selling those shares in order to buy Facebook shares.

Some investors shifted out of Zynga shares to buy Facebook. “Why would you now own Zynga if you really wanted Facebook?” said Luke Rabhani, partner at Stutland Volatility Group, an options trading firm, referring to the gaming company’s reliance on Facebook for its revenue.

However, many of these companies, particularly the smaller ones, were experiencing volatile conditions even before the Facebook offering.