IPO Allocation Suits to Spiral Higher

The promise of even more civil lawsuits charging wrongdoing by companies that recently went public and their underwriters came to light at a hearing in a Manhattan federal court last week. Nearly 800 such cases have deluged the court in the Southern District of New York so far, alleging that Wall Street underwriters took undisclosed commissions in the form of kickbacks for handing out coveted shares in popular IPOs.

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Retail investors and their lawyers plan to sue another 50 to 100 companies over the allegedly illegal allocation of shares in hot initial public offerings. The promise of even more civil lawsuits charging wrongdoing by companies that recently went public and their underwriters came to light at a hearing late in the afternoon on September 5 in Manhattan federal court. Nearly 800 cases involving some 270 IPOs and about 41 underwriters linked to them, have deluged the court in the Southern District of New York. The hearing at which U.S. District Judge Shira A. Scheindlin set a schedule for the proposed class actions was attended by more than 75 lawyers on both sides of the multi-case litigation. She and the lead lawyers agreed to create a Web site devoted solely to the cases. The suits stem from the reported multi-agency government investigation into the allocation of IPO shares. They charge that Wall Street underwriters allegedly took undisclosed commissions in the form of kickbacks for handing out coveted shares in popular IPOs. Those IPOs would regularly see their shares rocket in value anywhere from 100 percent to 500 percent on the first day of trading. The cases have been parsed into two groups, securities fraud to be handled by Judge Scheindlin, and a smaller set of antitrust cases that will be handled by U.S. District Judge William H. Pauley III. Those latter cases charge several of the top underwriters on Wall Street with collusion. Nearly all the securities fraud suits allege that big-name IPO underwriters — including FleetBoston Robertson Stephens, Credit Suisse First Boston and Goldman, Sachs & Co. — required their favored customers to pay higher prices for some shares in the aftermarket — a practice called “laddering.” Another common set of charges says that the underwriters required investors to buy shares in less-popular IPOs in order to later win shares of hot IPOs. In addition, the suits contend that those practices served to artificially inflate the prices of the IPOs, which caused investors to lose money once the stock prices fell. Mel Weiss, whose New York-based law firm, Milberg Weiss Bershad Hynes & Lerach, will be leading the 11 law firms in the securities fraud cases, said his firm and others expected to file many more cases. He asked for more time to choose a set of “bellwether” cases. But the court was adamant that the plaintiffs’ counsel choose their strongest cases by Sept. 28. Besides that date, Weiss and the other plaintiffs’ lawyers are battling the Dec. 7 statute of limitations filing deadline for these cases. About a year ago published press reports revealed that Credit Suisse First Boston, the New York arm of Zurich-based Credit Suisse Group, was facing a government probe into how it allocated shares of hot IPOs. In June CFSB fired three brokers in connection with the multi-agency probe reportedly being conducted by the U.S. Attorney’s office in Manhattan, the Securities and Exchange Commission and the National Association of Securities Dealers. Earlier September 5, at a roundtable discussion sponsored by the Professional Underwriters Liability Society, some attorneys verbally sparred over some of the legal issues, particularly the extent of liability facing the issuing companies. Weiss had a feisty exchange with Nina Locker, a litigation partner with Wilson Sonsini Goodrich & Rosati representing VA Linux Systems Inc. of Sunnyvale, Calif. The software provider’s IPO was priced at $30 but made its Dec. 9, 1999 Nasdaq debut at $2.99. It is now 100 percent below that opening price, closing Friday at $1.07. Weiss has proposed a stay for the charges against the issuers, indicating his intent to primarily take on the underwriters. But when Locker indicated that the issuing companies could not be criticized in the cases, Weiss grew irate. “I wouldn’t go brandishing this idea that the issuers are pure,” Weiss said to Locker. “If we’re not going after the issuers as much as we are going after the underwriters, you should sit back and relax and enjoy it.” Locker shot back: “No one should be fooled that the plaintiffs’ lawyers are going to allow issuers to just sit there.” She said the issuers would argue that it was the brokers who made the commissions from the individual investors; not the underwriters. “Why would underwriters need to get commitments if the offerings were [already] 200 times oversubscribed,” she asked. Locker argued that no investors were hurt by excessive commissions. “How could the investor be hurt by excessive commissions?” she asked rhetorically. In fact, she objected to the assumption that investors don’t bear any responsibility for throwing their money into companies that were not profitable and wouldn’t be profitable for years to come. Copyright (c)2001 TDD, LLC. All rights reserved.

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