U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19050 / January 25, 2005
SECURITIES AND EXCHANGE COMMISSION v. MORGAN STANLEY & CO. INCORPORATED, Civil Action No. 1:05 CV00166 (HHK) (D.D.C.)
SEC SUES MORGAN STANLEY FOR UNLAWFUL IPO PRACTICES; MORGAN STANLEY AGREES TO SETTLEMENT CALLING FOR INJUNCTION AND PAYMENT OF $40 MILLION PENALTY
The Securities and Exchange Commission (Commission) announced the filing of a settled injunctive action in federal district court against Morgan Stanley & Co. Incorporated (Morgan Stanley) relating to the firm's allocation of stock to institutional customers in initial public offerings (IPOs) it underwrote during 1999 and 2000. In settlement of this matter, Morgan Stanley has consented, without admitting or denying the allegations of the complaint, to a final judgment that would permanently enjoin Morgan Stanley from violating Rule 101 of the Commission's Regulation M and order it to pay a $40 million civil penalty. The settlement terms are subject to court approval.
In its complaint, the Commission alleges that Morgan Stanley violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by attempting to induce certain customers who received allocations of IPOs to place purchase orders for additional shares in the aftermarket. The complaint further alleges that Morgan Stanley did induce certain customers to place such orders during the new issues' first few trading days.
The Commission's complaint against Morgan Stanley, filed in the United States District Court for the District of Columbia, includes the following allegations:
Rule 101 of Regulation M, among other things, prohibits underwriters, during a restricted period prior to the completion of their participation in the distribution of IPO shares, from directly or indirectly bidding for, purchasing, or attempting to induce any person to bid for or purchase any offered security in the aftermarket. As a prophylactic rule, Regulation M is designed to prohibit activities that could artificially influence the market for the offered security, including, for example, supporting the IPO price by creating the perception of scarcity of IPO stock or creating the perception of aftermarket demand.
During the restricted period, i.e., prior to Morgan's Stanley's completion of participation in the distribution of IPO shares, Morgan Stanley attempted to induce certain customers to make aftermarket purchases in violation of Rule 101 of Regulation M by engaging in the following activities.
Aftermkt on [the Avanex IPO] goes into the 100's from lots of customers . . . . How is this for a strategy: put in aftermkt for $150, the stock runs to about $110, you buy it there - even if it pulls back and you lose some on the shares short term, you a) got more stock on the deal since your aftermkt was so freakin big b) if you[']re going to own it longer anyway so what if you buy at the peak on the first day and who[']s to say in this market the stock can[']t go even higher[.] The more outlandish the aftermkt, I would definitely figure the more stock you get.
After the distribution of IPO shares was complete, some of Morgan Stanley's sales force made calls and solicited aftermarket orders from certain customers who had provided aftermarket interest. Morgan Stanley viewed favorably follow-through aftermarket buying in the first few days of trading. For example, a syndicate manger e-mailed a sales representative, "thanks for following up with the [aftermarket] feedback. i am glad to know that the account reciprocated with aftermarket. tell them to keep it up." In addition, after customers bought shares in the immediate aftermarket, some Morgan Stanley sales representatives at times referred to their customers' aftermarket buying as fulfilling their "promises" or "commitments." Further, Morgan Stanley monitored customers' aftermarket purchases in the first few days of trading. This conduct, taken as a whole, demonstrates that when Morgan Stanley previously had solicited aftermarket interest from these customers during the restricted period, it was attempting to induce customers to place aftermarket orders in the first few days of trading.
Morgan Stanley also violated Rule 101 of Regulation M in the Martha Stewart Living Omnimedia IPO by soliciting a 350,000 share aftermarket order from a customer before all the IPO shares had been distributed. On the morning of the Martha Stewart Living Omnimedia IPO, and before Morgan Stanley had announced that syndicate had broken, Morgan Stanley called a customer and told it that Morgan Stanley was concerned because there were no aftermarket orders on Morgan Stanley's trading desk. Morgan Stanley then asked the customer to place an aftermarket order. The customer agreed to Morgan Stanley's request and placed an aftermarket order for 350,000 shares in the period before syndicate broke. Morgan Stanley executed the order later in the day after trading began. The customer sold all of its IPO shares and the shares it had bought in the aftermarket that same day.