FINRA Fines Morgan Stanley Smith Barney $5 Million for Supervisory Failures in Connection with Initial Public Offerings

The Financial Industry Regulatory Authority (FINRA) announced recently that it had imposed a $5 million fine on Wall Street brokerage firm Morgan Stanley Smith Barney. The fine resulted from the firm’s practices in selling shares in initial public offerings (IPOs) to its retail investor clients. FINRA’s press release described the firm’s failures:

From February 16, 2012, to May 1, 2013, Morgan Stanley Smith Barney sold shares to retail customers in 83 IPOs, including Facebook and Yelp, without having adequate procedures and training to ensure that its sales staff distinguished between “indications of interest” and “conditional offers” in its solicitations of potential investors.

In plain English, this means that the firm treated its clients’ preliminary, non-binding expressions of interest in buying shares in the IPOs of Facebook, Yelp and other companies the same as if the clients had agreed to bind themselves to an agreement to buy those shares. The firm even adopted a policy that treated “indications of interest” and “conditional offers” as if they were the same thing, which they are decidedly not.

Morgan Stanley Smith Barney’s misconduct in this area might sound esoteric or even technical, but its effect was very real. It resulted in investors’ buying shares in companies without knowing they were doing it. Morgan Stanley Smith Barney is a huge firm, with nearly 25,000 brokers working in over 800 branch offices, and it has millions of retail investor customers, so the impact may well have been widespread. And particularly in the case of Facebook, an unknowing investment could well have been disastrous, given the botched IPO and immediate tanking of the share price. Details of the firm’s misconduct are contained in the Letter of Acceptance, Waiver and Consent.

Then, after setting in motion this confusing procedure that failed its customers, Morgan Stanley Smith Barney failed to train its sales force or put in place any kind of education program or materials that would have helped set the brokers straight. The firm’s failure to supervise its brokers almost certainly resulted in the firm’s customers not understanding whether they were agreeing to buy shares or just having preliminary conversations

There are many reasons why retail investors should be wary of investing in IPOs, particularly the heavily hyped offerings of companies like Facebook, King Media, Zynga and others. We’ve written about those reasons on this blog before, and they’ve been well reported in major media outlets as well.

If an investor, knowing all risks inherent to participating in an IPO, makes an intentional choice to do buy in, so be it. But an investor should never be in the position of wondering whether he or she agreed to buy. That’s elementary, and Morgan Stanley Smith Barney fell down on the job.

If you have suffered an investment loss as a result of your broker pitching an IPO using misleading tactics or buying you shares in an IPO without your knowledge, please contact a securities attorney at The Galbraith Law Firm at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.