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When Simon D. Roffe graduated from New York University’s Stern School of Business in 1998, the stock market was the only place he wanted to work. He opened a small private hedge fund just as the Nasdaq was embarking on its now-legendary climb. He rode the market to its giddy heights, almost tripling an initial investment of several hundred thousand dollars by buying into hot new stocks like Commerce One, Sonic Foundry, Amazon, Ariba, and Yahoo — “the usual suspects,” as Roffe put it. Then the market went into freefall. “I basically went from driving a Porsche Boxster to being unemployed in the span of about two weeks,” Roffe wrote in a recent e-mail. “Quite a swing if you don’t mind my saying so.” Now Roffe and other investors are questioning whether the Internet stock market frenzy was fueled by more than mere irrational exuberance. He is signing on to at least 10 of 50 or so class action shareholder suits pending against recently public high-tech companies and the blue-chip underwriters that took them public. The lawsuits raise the question of whether favoritism and back-scratching on Wall Street hurt the small and individual investors who poured into the market in record numbers during the high-tech boom. By illegally manipulating initial public offerings in technology and Internet companies, the suits allege, the underwriters ensured the price would soar in early trading, drawing in the small and individual investors such as Roffe who were typically shut out of the IPO. The fund managers would then get out, leaving unsuspecting individual investors holding the bag when the stock later fell off its artificially created high. Individual investors “are playing with loaded dice in a crooked craps game,” Roffe wrote. “I simply want to balance the table so that everybody is playing on an equal table.” The suits came on the heels of a series of Wall Street Journal articles, the first of which appeared late last year. Those stories reported that the Securities and Exchange Commission, the Southern District U.S. Attorney’s Office and the National Association of Securities Dealers were investigating the manner in which underwriters rationed out hot IPOs. The inquiries reportedly focus on alleged promises extracted from institutional investors in exchange for getting in on the IPO, including commissions of up to 40 percent of the investor’s IPO profits and pledges to buy more shares in the future, known as “tie-in agreements.” SUITS PILE UP The news accounts caught the attention of several New York law firms specializing in securities fraud litigation: Milberg Weiss Bershad Hynes & Lerach, Sirota & Sirota and Lovell & Stewart. Milberg Weiss filed the first suit in January, in the federal court in Manhattan, against VA Linux Systems, whose first-day gain of 676 percent was the biggest IPO pop of the decade. Since then, the plaintiffs’ firms have been trotting out cookie-cutter complaints to the tune of 10 or so a month. The list of defendants reads like a Who’s Who of the dot-com world, containing such well-known start-ups as DoubleClick, MP3.com, priceline.com and Red Hat software, as well as the powerhouse securities firms like Goldman Sachs, Morgan Stanley and Credit Suisse First Boston who dominated the market for high-octane IPOs. There is room for hundreds of additional suits: According to Kyle Huske, a market analyst with IPO.com, IPOs in 1999 and 2000 totaled close to a thousand. Improperly inflated commissions and tie-in agreements violate laws aimed at preventing market fraud and manipulation, and if proven, could result in damages in the billions. For example, VA Linux’ stock market value has plummeted from $9.5 billion at the close of its first day of trading a year and a half ago to less than $180 million today. It is currently trading around $3, more than 99 percent off its all-time-high of $320. CHALLENGES AHEAD But it is a long road from an initial complaint to a check in the mail to wronged investors. Perhaps with this thought in mind, defense lawyers were practically yawning in the face of the flood of suits alleging IPO manipulation. “Anytime you get a Wall Street Journal article about an SEC investigation, you get litigation,” said Jonathan J. Lerner, a securities lawyer with New York’s Skadden, Arps, Slate, Meagher & Flom. “They’re garden variety [shareholder] suits with a twist.” Courts dismiss about a third of all securities fraud shareholder suits and Lerner questioned whether the complaints will survive the inevitable motion to dismiss. To back up their charges, the complaints all cite to the same anonymously-sourced newspaper accounts of alleged agency inquiries into IPO practices. No one at the SEC, the U.S. Attorneys’ Office or the NASD will officially confirm that the offices are conducting investigations. The heightened pleading standard under the 1995 Private Securities Litigation Reform Act requires sources for every allegation to be set forth with specificity, Lerner said. Citing anonymously-sourced news articles was “pushing the edge of the envelope,” he added. The initial complaints, however, are only the first step. Class action securities suits take time to get underway, and the complaints will most likely be amended and fleshed out before they are subject to court challenge, explained Harvey Goldschmid, former SEC general counsel and a professor at Columbia Law School. And although courts will not let a claim go forward unless a strong inference of a violation is shown, “judges are cognizant of the difficulty of obtaining hard information in this context,” he added. HARD CASE TO PROVE But even beyond any weaknesses in the complaints, corporate securities lawyers said the plaintiffs had other hurdles to overcome. “Proving this kind of conspiracy as a practical matter is very difficult,” said Barry Barbash, former director of the SEC’s division of investment management and a partner with the New York and Washington offices of Shearman & Sterling. “I can tell you that from my experience at the SEC.” First, simply showing that underwriters charged a higher commission does not really prove the case, he said. “There could be reasons [other than getting in on the IPO] for paying more commission, such as getting certain kinds of research or access to information,” he explained. Similarly, an institutional investor might have bought shares in the aftermarket because he was enamoured of the stock, not because of an illicit arrangement with the underwriter, Barbash said. Melvin I. Weiss of Milberg Weiss brushed aside the criticisms. Certainly everybody seems to agree the investigations are happening, and Weiss said the evidence he had of IPO manipulations went beyond the newspaper accounts cited in the complaints. “Everyone I speak to who is knowledgeable about these things say they’re absolutely on target,” he said. “I’ve seen this kind of stuff going on since the 1960′s,” he added, mostly in marginal firms or maybe a sole rogue Wall Street firm, like Drexel Burnham Lambert. “But I never saw the heart and soul of the most important Wall Street firms involved,” he said. For his part, Roffe wrote that he doubted the stock market would ever be truly fair for the small investor. “But,” he added, “I can at least make some noise and hopefully some things will change.”

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