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Sometimes, it’s better to keep quiet. In all the anticipation for Kraft Foods Inc.’s $7.6 billion initial public offering, overzealous underwriters distributed confidential documents to potential investors — a move that overstepped Securities and Exchange Commission boundaries prohibiting managers of the deal from jumping the gun, the food giant admitted in a filing Monday. The distribution of a controversial, premarketing feedback form could lead to legal troubles for Kraft, which hopes to bring its offering to market next month. Tim Kellogg, a spokesman for Philip Morris Cos. Inc., the parent of Kraft, declined to comment, citing the quiet period. The underwriters were also mum. Credit Suisse First Boston spokeswoman Victoria Harmon and Salomon Smith Barney Inc. spokesman Dan Noonan both declined to comment. The problem began shortly after the underwriters set the terms May 2 for Kraft’s IPO, expected to be the second-largest after last year’s $10 billion offering from AT&T Wireless Group Inc., a unit of AT&T Corp. Institutional investors said that only hours after setting the terms, Kraft and its underwriters started aggressively premarketing the IPO, holding conference calls to solicit feedback on the pricing and other questions regarding the spin-off from tobacco company, Philip Morris. Such a move is unusual, since it was weeks before Kraft’s road show and at least a month before the IPO was set to come to market. Usually, investment banks wait until the road show to get feedback. Had Kraft stopped with the conference calls, it might have been fine, sources said. But confidential documents meant only for underwriters fell into the hands of some institutional investors. In its filing, Northfield, Ill.-based Kraft said the documents included a premarketing feedback form meant to gather investors’ reactions. And, according to sources, the form could have been only one of several documents to fall into the wrong hands. Other documents could have included drafts of a revised registration statement, including information about the offering not yet public. In the filing, Kraft stated that the feedback form was for “internal use only and was designed to elicit orally certain information from designated accounts as part of designing strategy in connection with this offering.” The form was to enable underwriters to gauge investor reaction. According to institutional investors familiar with the conference calls, the underwriters asked whether the initial price range of the IPO, at $26 to $31 a share, would be appealing. At the time, such a high price in a shaky IPO market made an offering such as Kraft’s look bold, even risky, despite the company’s financial strength. The IPO’s sheer size could have contributed to the zeal of the underwriters, placing pressure on them to sell millions of shares quickly, some sources said. The information then may have reached investors two ways, sources said. Kraft and its lead underwriters held a meeting with the 13 members of the IPO syndicate in order to distribute materials relevant to the offering. In one version of what may have gone wrong, one of the members of the syndicate either mistakenly or intentionally distributed the IPO feedback form to potential investors they were courting. Another unlikely scenario speculates that someone attended the meeting who should not have been there and then leaked the papers to investors. Either way, the Kraft IPO ran afoul of SEC rules. The premarketing form constituted written information about the IPO outside the prospectus — a violation of SEC rules known as “jumping the gun,” one legal source said. In addition, some institutional investors, but not others, received the leaked documents. SEC rules state that any information made available to institutional investors or research analysts must also be made available to the public. Julie Allen, a partner with New York-based law firm Proskauer Rose LLP, who was not involved in the Kraft deal, said such incidents are common. “This may be a fairly high-profile example, but it’s happened in other deals where someone says or does something outside of the boundaries.” She added: “No matter how well-schooled people are in knowing better, they still make mistakes.” In this case, such an error could prove costly, although one lawyer doesn’t believe the SEC would go after the company or its underwriters because of Kraft’s admission. An SEC official refused to comment, citing the agency’s policy of not commenting on specific registrations. Kraft stated in its filing that anyone who received the feedback form and buys shares of the stock is entitled to seek a refund, or damages. However, the company said: “We do not believe that any attempts to recover these losses will have a material adverse effect on our financial position.” Copyright (c)2001 TDD, LLC. All rights reserved.

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