Market Questions Morgan Stanley's Pre-IPO Uber Stock Placements for FAs
Wirehouse Morgan Stanley took the rare step of offering employees, including some of its financial advisors, as well as high net worth clients, the opportunity to invest in Uber Technologies, prior to the ride-hailing company’s Initial Public Offering this month. And Morgan Stanley employees’ participation in the pre-IPO deal, reported by Bloomberg, raises questions.
The PE deal had already drawn skeptics and a proposed class-action investor lawsuit against the ride-hailing company before the Uber IPO’s lackluster market reception. It’s raised even more questions since the shares of Uber’s IPO offering, for which Morgan Stanley was the lead underwriter earning reportedly $41 million in investment banking fees, slid during their first few days on the public markets. Bloomberg reported the Morgan Stanley’s pre-IPO PE deal’s price was valued at $48.77 per share. Since Uber went public this month, its stock price has fallen as low as $36.08.
Morgan Stanley's spokesperson did not return a request for comment for this story.
“There are definitely conflicts of interest,” says Jay Ritter, a professor at the University of Florida’s Warrington College of Business, who specializes in IPOs. Those conflicts potentially arise between Morgan Stanley, as the lead underwriter, and the pre-IPO deal’s investors — both employees and clients, Ritter says. The SEC requires underwriters with prior investments in a company to retain “independent underwriters who sign off on the offering that the price is fair, but in practice that tends to be just a formality,” Ritter says.
“Obviously, the Uber trading has not worked out so well. There are a lot of reasons the stock is where it is,” says financial advisor recruiter Bill Willis, president and CEO of Willis Consulting in Palos Verdes Estates, Calif. “I probably wouldn’t have let my advisors participate in it because of the way that this all smells and sounds,” Willis says about the pre-IPO deal. “It looks they were giving advisors preference but maybe the answer is that they did because they couldn’t fill out that round of funding,” he adds.
According to a story in the New York Times, published in February 2016 at the time of the pre-IPO private equity deal, Morgan Stanley offered $475 million of new preferred stock in Uber through a special fund labeled New Rider LP. Investors in New Rider needed to have $10 million net worth and a minimum $250,000 investment.
“For Morgan Stanley, the deal may raise competing loyalties. The deal may have been more important to Morgan Stanley for cementing its relationship with Uber” than for its potential investors, the story concludes. “It could put the Wall Street firm in a prime position for investment-banking business, like leading an initial public offering or advising on acquisitions. Morgan Stanley has sought to address this tension by including 10 pages of potential conflicts of interest in the deal documents,” the Times article states.
At this point, New Rider’s investors are prohibited from selling shares for 180 days after the IPO, according to Bloomberg.
But the exact terms of the offering are not publicly available, as Morgan Stanley has sought to keep them confidential. Last year the wirehouse’s lawyers from Simpson Thacher & Bartlett filed a motion in support of Uber’s attempt to keep the documents sealed in the company’s legal battle with Irving Firemen’s Relief and Retirement Fund from Texas, which invested in New Rider. Morgan Stanley’s John Gernon, a managing director and head of equity products, wrote a declaration in support of the wirehouse’s sealing motion.
Morgan Stanley “is in the business of providing investment and risk-management solutions to a wide range of investors and institutions including corporations, pension plans, intermediaries, sovereign wealth funds, central banks, endowments and foundations, individual investors (including high net worth), governments and consultant partners worldwide. Competitors of the Manager and/or Morgan Stanley have and will likely continue to offer limited partnership interests similar to those offered by New Riders LP, and those competitors would likely be interested in the confidential, non-public information contained in the Confidential Limited Partnership Materials,” Gernon wrote. Release of the New Rider terms would cause “competitive harm,” he added.
The Irving Firemen’s pension fund first filed its complaint against Uber in September 2017. In it, the pension fund alleges Uber misrepresented to it and other New Rider investors the extent of the company’s security data breaches, sexual harassment problems, and negative publicity, which was likely to curb its growth.
In the 12 months prior to the Irving Firemen’s pension fund filing the lawsuit, Uber suffered a wave of bad news. It settled for $20 million with federal investigators looking into allegations the company misled drivers about pay; faced an onslaught of negative headlines about its allegedly “toxic” work environment for women; became embroiled in a legal battle with Google, which alleged Uber’s executives engaged in trade secret theft to obtain self-driving car technology from Google’s Waymo unit; faced federal investigators’ inquiries a second time after the Times reported that its “Greyball” technology deceived municipal authorities about the company’s flouting of their laws; and, ultimately, in June 2017, founder Travis Kalanick quit his CEO role in the wake of the controversies.
In the company’s pending motion to dismiss the Irving Firemen’s lawsuit, Uber’s lawyers argue that the pension fund had no standing in court since it, and other New Riders’ investors, only purchased shares in a Morgan Stanley-backed limited partnership, which owns the stock, and do not themselves share direct ownership of stock.
With 20/20 hindsight of Uber’s 2017 troubles and this month's IPO’s market reception, it’s tempting to ask: Why did Morgan Stanley entwine itself, its reputation and its employees in the pre-IPO Uber fundraising, particularly since it has led to such questions?
“I don’t know the facts, but it’s possible that part of the pitch to get the lead as the underwriter is we can also raise additional capital for you pre-IPO through this deal. On the other hand, Morgan Stanley’s people were also true believers in Uber. Maybe clients were probably clamoring for a pre-IPO deal. I don’t think Morgan Stanley had any bad ideas,” Ritter says.
For Morgan Stanley, its capability to offer private equity deals to wealth clients ranks as an advantage generally, and likely with the New Rider deal specifically, he says. “Morgan Stanley was viewing this as an opportunity to get in. If Uber’s stock had gone up, it would have created a lot of good will with clients and prospects. At this point though, things haven’t worked out very well,” Ritter says.