The SEC and NASD are investigating Merrill Lynch, Morgan Stanley, Salomon Smith Barney, Prudential Securities and UBS PaineWebber for their alleged involvement in IPO underwriting scandals, an attorney involved in the case confirmed to Registered Rep.
Credit Suisse First Boston, one of 50 firms involved in the investigation for artificially raising the price of IPO shares, has already agreed to a $100 million settlement with the SEC.
The SEC and NASD probe alleges that Wall Street firms rode the tech wave of the late 1990s and early 2000 to capitalize on an insatiable demand for tech IPOs, pulling in billions of dollars in underwriting fees while allotting shares of IPO offerings in exchange for investor kickbacks in the form of higher commissions.
According to Melvyn Weiss, the lead attorney in the class-action lawsuits against the Wall Street firms, over 1,000 suits have been filed for abusive IPO allocation practices by the firms.
Firms cannot comment on SEC investigations. The SEC refused to confirm or deny that Merrill Lynch, Morgan Stanley, Pru, Smith Barney and PaineWebber were among the firms under investigation.
Other firms that have had lawsuits filed against them include Goldman Sachs, Bear Stearns, U.S. Bancorp Piper Jaffray, J.P. Morgan Chase, Lehman Brothers and Deutsche Bank Alex. Brown, according to Weiss’s firm, Milberg Weiss Bershad Hynes & Lerach LLP.
Approximately 311 IPO offerings are in question in the investigation of underwriting fraud, the law firm says.
“I obviously can’t predict the outcome of the suits, but the CSFB settlement is a big indication of what the firms were doing, and the cost of the illegal practice is very substantial,” Weiss says.
"We allege the firms violated the antitrust division of federal security laws by not disclosing the way they market these IPO’s," Weiss says. "We also allege that by not disclosing true compensation and by forcing customers to give kickbacks or a portion of their profits, [the firms] engaged in a manipulative practice in the aftermarket of these high tech IPOs." As a result of the alleged violations, the SEC plans to revamp its rules to prevent future abuses by clarifying IPO practices, the regulatory organization said.
One of the alleged scandals involves Webvan’s IPO underwriters Merrill Lynch, Smith Barney, Goldman Sachs, Robertson Stephens and Bear Stearns, according to sources. The suit charges that a portion of Webvan's IPO registration statement filed with the SEC was “false and misleading" because it did not disclose that the firms had "solicited and received excessive and undisclosed" commissions from specified investors, according to sources. The suit also claims that the firms had agreements with investors to buy additional Webvan shares for pre-determined prices at a later date in exchange for their IPO purchase.
``This is a form of market manipulation,'' Weiss says, arguing that such payments should have been disclosed in the prospectus to other investors.
Other companies whose IPO shares were allegedly inflated include VA Linux Systems Inc., Red Hat Inc. and Akamai Technologies Inc. In the case of VA Linux, its shares surged as high as $320 on the first day of trading on Dec. 9, 1999, compared with an IPO price of $30. CSFB was the underwriter. Shares in the company, now called VA Software Corp., have deflated to $2.49 as the Internet bubble exploded.
Payments from the settlement with regulators will go to the SEC and the NASD, not to investors who claim they lost money investing in technology companies, Weiss says.
Upon completion of the investigation and settlements, the SEC plans to send out proposals on how IPO issues should be handled in the future, the organization says. The SEC says Chairman Harvey Pitt is concerned about halting illegal practices by underwriters that alter the price of new stocks after they begin to be traded. Any practice that “attempts to channel a market's response” to a new IPO offering is problematic, according to the SEC.