On Wall Street, ignorance may be a valid defense against accusations of fraud.
Last week, Morgan Stanley (MS) was one of three investment banks criticized for allegedly mismanaging the LinkedIn (MS) IPO, after the social network’s share price more than doubled in its first day of trading. For example:
Joe Nocera: “LinkedIn was scammed by its bankers. The fact that the stock more than doubled on its first day of trading — something the investment bankers, with their fingers on the pulse of the market, absolutely must have known would happen — means that hundreds of millions of additional dollars that should have gone to LinkedIn wound up in the hands of investors that Morgan Stanley and Merrill Lynch wanted to do favors for. Most of those investors, I guarantee, sold the stock during the morning run-up. It’s the easiest money you can make on Wall Street.”
Henry Blodget: “LinkedIn’s underwriters, Morgan Stanley, Bank of America, et al, just screwed the company and its shareholders to the tune of an astounding $175 million. (Just the way the underwriters of another recent hot IPO, Zipcar, screwed that company). How? By wildly underpricing the deal and selling LinkedIn’s stock to institutional clients way too cheaply.”
Morgan Stanley was back in the IPO underwriting biz again today, as the only LinkedIn banker to also participate on a $1.3 billion offering for Russian search giant Yandex (YNDX). This time it helped price the company’s shares at $25 a piece, or around 55% lower than where they closed their first day of trading ($38.84 per share).
I’ll assume that Nocera and Blodget think that Yandex also got scammed, albeit less egregiously than did LinkedIn. But isn’t there a third option: Investment bankers don’t really know how to price Internet stocks.
When scamming someone, the golden rule is to be discrete. The 1919 White Sox, for example, lost Game 4 of the World Series by a score of 2-0, not 20-0. It’s called plausible deniability.
If the LinkedIn bankers were really trying to hustle, then they’re worse at it than Ziggy Sobotka. One could argue that they were more careful with Yandex — 55% bump rather than a 100% bump — but the increase remains too high for conman comfort.
As I wrote earlier today, there isn’t really a legitimate comp for Yandex. And it didn’t even have private market trading to set a floor. Sure there is value in Morgan Stanley getting a bargain for its high-net-worth clients, but there also is disincentive to it becoming known as a serial under-pricer.
So this leaves me with two options: Morgan Stanley bankers are stupid (i.e., incompetent grifters) or ignorant (as is most everyone about accurately pricing new Internet stocks). I’m pretty sure it’s the latter…