By Suzanne Barlyn
Nov 6 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
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
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
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
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,
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.