Did Morgan Stanley ‘scam’ its clients on Pandora?

June 16, 2011, 12:12 AM UTC

Pandora shares closed barely above their IPO price. Who’s going to blame the bankers?



Last month, Morgan Stanley was among those banks accused of intentionally under-pricing the LinkedIn  IPO, as a way to generate easy returns for its wealthy clients. In case you forgot, here was the argument from 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.”

Let’s assume that Nocera is correct: Omniscient bankers know what will happen to a company’s stock on its first day of trading. If so, then Morgan Stanley has since changed its tune. Rather than “scam” Pandora (P), the Internet company it took public earlier today, it chose to “scam” the same type of clients it made rich on LinkedIn.

Pandora priced its IPO shares at $16 a piece, which was much higher than initial expectations. Its shares opened at $20 per share and almost immediately spiked above $25, but then began sliding backwards. At market close, Pandora shares settled in at $17.42 per share.

That’s just an 8.88% bump, which is significantly less than the 15% discount that bankers tacitly promise clients who buy in at IPO.

Now it certainly is true that Pandora happened to go public on a particularly bad day, when soft U.S. economic data and new Greek debt troubles caused the Dow to slip 178 points. And it also is true that Pandora received a serious slug of skeptical press following last night’s pricing (including from yours truly).

But shouldn’t Morgan Stanley have known these things were going to happen? Doesn’t it still have its “fingers on the pulse of the market?” And, if so, why did it sell $18 shares to wealthy clients, when those shares would be worth barely more at day’s end?

Was it some sort of way to make amends for its LinkedIn “scam?” Maybe to get back into the graces of a major venture capital firm like Greylock, which had pre-IPO stock in both LinkedIn and Pandora?

Or is it possible, just possible, that the LinkedIn carping was little more than Monday morning quarterbacking? And that banks like Morgan Stanley guess on future outcomes like the rest of us…