Morgan Stanley tries to halt investor's Facebook arbitration

Morgan Stanley is trying to halt a securities arbitration case filed by a Facebook investor who blames the firm and other companies for $1.9 million in damages stemming from the social media giant's botched initial public offering.

Lawyers for Morgan Stanley, a lead underwriter for the IPO, filed a complaint in federal court in Manhattan on Monday seeking an order to stop the arbitration as it relates to the brokerage, because Morgan Stanley says the investor is not its customer.

The complaint, filed in U.S. District Court for the Southern District of New York, alleges the investor ordered the Facebook shares through Vanguard Financial Group Inc, and is, therefore, not a Morgan Stanley customer.

The investor, Uma Swaminathan of East Brunswick, New Jersey, did not return a call requesting comment.

Swaminathan filed a claim in the arbitration unit of Financial Industry Regulatory Authority in July, according to Morgan Stanley's complaint. Spokespeople for Vanguard, Nasdaq and Facebook did not immediately respond to requests for comment.

Reuters was not able to immediately review the arbitration claim because FINRA, the securities industry's self-regulator, does not make them publicly available.

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.

In addition to Morgan Stanley, Swaminathan also named Vanguard, Facebook, NASDAQ OMX Group Inc and the NASDAQ stock exchange in her arbitration request.

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.

Other lead underwriters were JP Morgan Chase & Co and Goldman Sachs Group Inc . Neither firm was named in Swaminathan's case. 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.

Nasdaq OMX Group has also been sued in court by investors who claimed the exchange operator was negligent in handling orders for Facebook shares.

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 the 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.

(Reporting By Suzanne Barlyn; Editing by Leslie Adler)