Published November 06, 2012
Morgan Stanley is trying to halt a securities arbitration case filed by a Facebook investor who blames the firm and other companies for losses she suffered in the social media giant's botched initial public offering and is seeking $1.9 million in damages.
Morgan Stanley, a lead underwriter for the IPO, says the investor is not its customer, and lawyers for the bank filed a complaint in federal court in Manhattan on Monday seeking an order to stop the arbitration as it relates to its firm.
The complaint, filed in U.S. District Court for the Southern District of New York, alleges the investor is not a Morgan Stanley customer because she ordered the Facebook shares through Vanguard Financial Group Inc.
The investor, Uma Swaminathan of East Brunswick, New Jersey, did not return a call requesting comment.
Swaminathan, according to an arbitration complaint she filed with the Financial Industry Regulatory Authority, said Morgan Stanley did not inform all investors that it was downgrading its outlook on Facebook just before the IPO and said she was unable to cancel her order for shares.
In addition to Morgan Stanley, Swaminathan also named Vanguard, Facebook, NASDAQ OMX Group Inc and the NASDAQ stock exchange in her arbitration request.
Facebook and NASDAQ do not have FINRA licenses, and therefore are not required to arbitrate in its forum. Several units of Vanguard are licensed through FINRA, the securities industry's self-regulator.
A Facebook spokesman did not respond to a requests for comment. Spokesmen for Vanguard and Nasdaq declined to comment.
A successful outcome for Morgan Stanley could be precedent for preventing other investors from using FINRA's arbitration unit as a path to resolve Facebook-related legal disputes with certain entities, said Steven Caruso, a New York-based securities arbitration lawyer.
Pushback from firms involved in the IPO could leave investors who seek arbitration with only costly, longer court cases as a way to resolve any disputes, Caruso said.
Facebook's May 18 debut was marred by trading glitches and confusion. The IPO also became mired in controversy as shareholders, in more than a dozen lawsuits, accused Facebook and its underwriters of obscuring the company's weakened growth forecasts ahead of the stock offering.
Swaminathan, according to an arbitration complaint she filed with FINRA, said Vanguard failed to heed her request to cancel her order for shares after the stock did not begin trading on time.
Other lead underwriters were JP Morgan Chase & Co and Goldman Sachs Group Inc. Neither firm was named in Swaminathan's case.
Morgan Stanley's main argument for putting a stop to the arbitration is that Swaminathan does not have a retail brokerage account with the firm and "has not engaged in any securities or business dealings with the firm," according to its court complaint.
Investors who have brokerage accounts typically agree, when signing account opening documents, to resolve legal disputes in FINRA's forum. Swaminathan, however, does not have such an agreement with Morgan Stanley, according to the complaint.
Swaminathan, who is not represented by a lawyer in the arbitration case and described herself as a retired teacher and widow, put her life savings in the investment, according to her complaint.
Morgan Stanley, she said, "informed their own privileged clients" that it was downgrading its outlook on the stock, just before the IPO, and then issued more shares while raising the price "just to suck more suckers into the stock," according to her FINRA complaint filed in July.
A Morgan Stanley spokeswoman declined to comment beyond the statements in its court complaint.
Swaminathan instructed Vanguard to buy 6,200 Facebook shares when trading began on May 18, a Friday. She tried to cancel the order after it became clear that Facebook trading would begin later than expected, but Vanguard executed the order, although she made several efforts to follow up on cancellation request, she wrote.
Swaminathan said she remained "trapped" in the stock until Monday morning, when it had declined to "around $8 to $9" per share. It is unclear how much Swaminathan paid per share; the IPO priced the shares at $38 by underwriters.
Her $1.9 million claim includes $105,000 for compensatory damages, $500,000 for punitive damages, $1 million for "pain and suffering" and $315,000 in treble damages, which are typically awarded in certain instances of fraud.
(Reporting By Suzanne Barlyn; Editing by Leslie Adler)