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Mel Weiss is one of the last people any Wall Street firm wants to find knocking on the door. His New York law firm, Milberg Weiss Bershad Hynes & Lerach, has helped recover $800 million for investors in the investigation of junk bond king Michael Milken and $2 billion for policyholders of Prudential Life Insurance Co. of America. Milberg Weiss, along with several other law firms, is currently representing investors who allege in proposed class actions that underwriters and company executives acted improperly in determining the allocations of shares for hot IPOs during the tech boom. Weiss has been appointed lead counsel in the cases brought against VA Linux Systems Inc. and Merrill Lynch B2B Internet Holdrs in connection with their IPOs. Credit Suisse First Boston acknowledged in federal filings that it is under investigation by the Securities and Exchange Commission and possibly the U.S. Attorney’s office in New York. The probe has already caused CSFB to fire staffers and likely contributed to the ouster of CEO Allen Wheat. Over the years, Weiss’ firm has sued everyone from Apple Computer Inc. to Microsoft Corp. to the government of Poland, the last during his involvement in the spate of lawsuits to recover property and lost money for Holocaust survivors. The firm is known for its tenacity — it has sued 3Com Corp. at least three times for various reasons — and for roping in big settlements in controversial cases. But the firm itself hasn’t been without controversy. It is widely believed that the perceived over-litigiousness of Milberg Weiss, coupled with a business-friendly Republican legislature, was the main driver for the Private Securities Litigation Reform Act that Congress passed in 1995. A mention of the PSLRA is now a required boilerplate in every securities transaction, a consistent reminder of Weiss’ aggressive efforts. Then, early last year, internal disputes involving the firm’s aggressive West Coast operations led one of Milberg Weiss’ partners to head to a rival firm. Still, the controversies have not cut into the firm’s business. Their latest targets: Wall Street’s investment banks. Below, Mel Weiss talks to The Daily Deal about his expectations for the IPO allocation lawsuits and how he plans to get more money for investors out of Wall Street. The Daily Deal: What made you first believe you should bring these cases? Mel Weiss: When we started our own confirmatory investigation into what we were hearing and we found these things were true — or at least, we believe they were true. I’m not the final judge. DD: How did you first hear about the issues in the IPO allocation lawsuits? Weiss: The practices that are the subject of these IPO cases are practices that we’ve seen since the 1960s. The so-called “casino markets” of the ’60s were rife with practices where market manipulation accompanied IPOs. But in those days they were usually issuances of small-cap companies by marginal players on Wall Street. The current situation is remarkably different in that it involves the top names on Wall Street and the practices were so overt that almost anybody you speak with now confirms the different aspects that we’re alleging. Such as: In order to get an allocation, you have to first generate fee income, and for every X dollars of fee income, you’re going to get Y number of shares. Then on top of that you have to agree to buy a certain number of shares in the aftermarket, not for investment purposes but just to generate momentum and the illusion of liquidity and size. Then on top of that you have to kick back a percentage of profits afterwards. These were all being done in a sort of open and notorious fashion. What we have here is a lust for profit, a sense of invincibility because Wall Street thinks that plaintiffs’ lawyers and the SEC are defanged and they can pretty much do what they want with impunity. Now it really doesn’t take a rocket scientist to figure out that 10 years of a bull market is going to create a scramble for good product to bring to market because you use the best product in the beginning and then it starts drying up. Yet you have all these profits that have been made that want to be reinvested and so you create a variety of mechanisms to accomplish that. And one mechanism is that you polish the images of the bad product. You create language that will make the huge increases in price look rational by calling it “the new economy,” “emerging markets,” that all of these things are “converging.” People will accept it as a rationale for the increase and not look behind it and find it is rotten to the core because it is created through sleight-of-hand, through market manipulation, laddering and so forth. Combine this with analysts who don’t keep their jobs unless they’re writing wonderful things about these companies. Another thing the customers were forced into doing was to buy the so-called cold offerings in order to get into the hot ones. So the investment bankers were having to market offerings that wouldn’t ordinarily be marketable other than the fact that they were increasing the market for buyers in the hot issue offerings. We also found out that in some instances people in the investment bank high up are also part of the venture capital group that invested in these companies so they had another undisclosed piece of the deal. And since a lot of that 144 stock [Rule 144 is the safe-harbor provision controlling when holders of restricted securities can sell in secondary distributions] is restricted until certain events take place, I am told that some of those restrictions are relieved once the stock achieves a certain level in price — in other words, not just a temporal restriction. And that could also be another incentive to hype up the stock quickly so the insiders can get out more quickly. DD: On the other side, people are saying the investment banks are doing what any seller does: Giving the public what it wants. Weiss: That’s wrong. Because there are watchdogs, and one of the watchdogs is the underwriter. Under the law, the underwriter has the obligation to both do due diligence and to know their customer. There’s a duty that the underwriter has to the customer not to deceive that customer, not to direct that customer to an investment that’s not suitable. And it also has a responsibility to tell the truth and to disclose all material information. So when [the underwriter] issues a prospectus and it states on the cover of the prospectus — that’s how important this information is deemed to be — that the underwriter’s compensation is X, when in fact the underwriter’s compensation is a multiplier of X because it’s getting kickbacks and payoffs and the like, it’s a total deception. DD: You mentioned that the underwriters have a responsibility to their customers. They might argue that their customers are the issuers, and that they’re helping the issuers boost their stock prices. Weiss: They also have a responsibility to the purchasers. They’re the customers as well. DD: On Wall Street, there’s been an unspoken acknowledgment that they’ve been doing things like this for years. This didn’t just come about with tech. Weiss: I’m sure [the underwriters] didn’t say they’ve been doing what I said they have been doing for many years. They may have said they’ve been giving allocations to favored customers for many years. I don’t think they’ve been telling anybody they’ve been taking kickbacks from them. DD: So overall is this a new phenomenon? Weiss: I think it’s not new, that it’s a practice that had taken place in former hot issue markets. But it is something that can really only work in a bull market because the only reason somebody’s going to want an allocation is that they’re assured of a profit. DD: To really understand the issues here, can we backtrack and go through the IPO allocation process as it should be from the time that the company chooses an underwriter? Weiss: One, the allocations should not be a result of promises to pay compensation over and above what is disclosed in a prospectus. Two, it shouldn’t be coupled with an obligation to buy in the aftermarket. Three, it shouldn’t be coupled with an obligation to make a kickback of subsequent profits. All of those things are illegal. I’m not saying that an underwriter doesn’t have discretion as to who it can offer shares to, but [that decision] has to be based upon business considerations other than kickbacks. And certainly forcing people to buy in the aftermarket what are essentially wash transactions just to create the illusion of activity and upward momentum is illegal. It’s painting the tape, in effect. DD: How many cases have you brought so far? Weiss: Probably more than 20. DD: In these cases, who are you trying to protect? Weiss: The consumer investors. The person who’s buying stock in the market who thinks he’s buying into a free market that’s not being driven by artificial forces. DD: One expert mentioned that one sticking point might be finding a plaintiff with standing in these cases. He suggested individual shareholders may not have that. Weiss: I assume that he meant that people who bought on the initial offering are likely to have sold at a profit and not have a loss. Of course you have standing if you bought stock in the aftermarket or on the offering and you were deceived. I think we can demonstrate that the illusions of high volume, liquidity, upward momentum, analyst reports trumpeting all of this stuff, the use of the bullish language creating a justification for these price increases had a continuing impact for a long, long time after the offering first took place. Indeed, I might even argue that it might be responsible for a significant part of the overall euphoria that affected all stocks, even those already listed on the New York Stock Exchange and on Nasdaq. DD: What’s the current status of the cases, as far as you know? Weiss: They’re all in a position where, except for VA Linux, they’re all in their formative stages. The PSLRA [securities law reform act] requires that certain steps be taken to organize these cases and they take a long time. DD: So when it comes time for the discovery process, what do you hope to find? Weiss: I think I know what I’m going to find. I’m going to find a lot of transactions among the customers are illusory. In other words, they’re wash transactions just engaged in to generate fee income. DD: How do you prove that? Weiss: You can just see it. If somebody is just buying and selling shares just to create commissions, it’s not rational. I’m going to find purchases in the aftermarket that will also be not-for-profit type transactions just to create market activity. I’m going to find a variety of transactions that are designed just to give kickbacks. I’m going to find that a lot of these customers created multiple corporations to make it appear as if the distribution was greater than it really was, so you’ll have a common owner of maybe 20 or 30 or 40 different buying entities, all of which is known to the underwriters. And I’m going to find that some of these folks [on the underwriting side] had venture capital investments in some of these companies. And I’m going to find that the lead underwriters were intertwined in many, many deals. There’s a lot of cross-semination of information and practices among the underwriters. DD: The U.S. Attorney’s office is very deeply involved in these cases. Some people have argued that this is a way for the U.S. Attorney’s office to expand its reach into more regulatory issues. Weiss: That’s what its job is. Its job is to ferret out criminality and to prosecute it. That’s what U.S. Attorneys do. Just because they’ve been lax in terms of Wall Street-type practices in the past doesn’t mean that this is an expansion. It means that it’s stepping up to the plate maybe for the first time. And it had a duty to do so before. DD: What do you think of the overall trend towards more of these cases? Is it going to help or hinder a resolution? Weiss: I learned a long time ago that when defendants want to clean up something they want to clean it all up. So they’re going to want every possible problem taken care of. So it’s going to expand. Because there’s a lot more problems out there than we’ve already identified in our lawsuit up until now. I expect it to be a very broad resolution and maybe historic, besides. Copyright (c)2001 TDD, LLC. All rights reserved.

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