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>If the price then drops (because the initial offering price was too high) those preferred clients lose money.

Unless these preferred clients are active traders, this isnt a problem. Remember when government nixed fiduciary resposibility?

Just slide a soon-to-drop, over-valued-at-IPO stock into say,... someones' retirement account? Wouldnt it be weird if a bunch or Morgan-Stanley-managed 401Ks were shifted to include that?

Especially if the bank managing the IPO gets a cut of the cash, there's no downside to such. At least for them.

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