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Talk about a can of worms. Earlier this month, a federal judge in Florida transferred to New York a class action filed by a dot-com against the underwriter that took it public. The suit, believed to be the first in which an issuer is asserting an underwriter cheated it out of proceeds from its initial public offering, will now be heard by U.S. District Judge Shira Scheindlin of the Southern District of New York. Scheindlin is already presiding over 800 securities suits that investors have filed against underwriters, accusing them of fraud in the handling of late-1990s IPOs. Because the Florida case, filed by Mortgage.com against Credit Suisse First Boston, seeks relief for all companies it took public, it puts scores of dot-coms in the position of being both defendants and potential plaintiffs in the related cases in front of Scheindlin. “Well, I think no one has any idea how it’s going to work yet,” said Mortgage.com attorney Steven Toll, when asked about the dual role that dot-com companies are being asked to play. Florida U.S. District Judge Patricia Seitz transferred MDCM Holdings Inc. v. Credit Suisse First Boston Corp. on Oct. 10. The suit was filed by a bankruptcy assignee sifting through Mortgage.com’s ashes. It’s too soon to say how the Mortgage.com case will affect the investor-filed actions. But it presents several unique scenarios. For example, in the investor actions, issuers have maintained a united front with underwriters, even though some of the former wonder why they’ve been named. They reason that even if the allegations of “laddering” and other allocation abuses are true, issuers wouldn’t have benefited from them. But if issuers decide to actively participate in the Mortgage.com class, it would pit them against the underwriters and divide the united front. Toll, managing partner of Cohen, Milstein, Hausfeld & Toll in Washington, D.C., said he’s been in contact with a few potential Mortgage.com class members — there could be hundreds, he believes — but not enough to make a determination about how many will participate. As companies bottom out and face the prospect of bankruptcy, they may decide to turn on the underwriters. The Mortgage.com suit alleges Credit Suisse did not offer its stock to the public in accord with the underwriting agreement. Instead, the complaint alleges, “it entered into an arrangement whereby it received excess compensation from certain purchasers in the IPO or used the IPO shares as bait to lure additional profitable business.” The Mortgage.com suit could create conflicts for some of the big firms that helped take many of the companies public — including Wilson Sonsini Goodrich & Rosati, Morrison & Foerster, Brobeck, Phleger & Harrison and Cooley Godward — and also represent underwriters in other litigation. One lawyer familiar with the litigation said the firms have all obtained waivers. Underscoring the idea that the investor suits and the Mortgage.com class action are not necessarily the same animal, Toll thinks the investors have no case against the issuers. Easy enough to say about companies he’s courting as potential class members, but he goes further. “Do I really think the investors have cases against the underwriters? No,” he said. “Some of those cases are absolutely silly.” The Mortgage.com suit is just the latest development in a pattern of lawsuits one lawyer has said is an attempt to “indict a whole era.” Briefing is now under way in Scheindlin’s courtroom over a move by the underwriters to have her taken off the case. Lawyers for the underwriters, including Deutsche Banc Alex. Brown and others, investigated not only Scheindlin’s investing background but her son’s as well, and discovered trades they argue are grounds for her recusal. Legal ethics expert Geoffrey Hazard Jr. submitted a declaration supporting the bid, although he was silent on whether the judge’s son’s investments mattered. The issuers haven’t joined in the recusal motion.

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