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The National Association of Securities Dealers Regulation Inc. has censured and fined several big-name brokers in its latest investigation into initial public offerings. Fleet Securities Inc. — which owns discount broker Quick & Reilly — along with Schwab Capital Markets, an affiliate of Charles Schwab & Co. Inc., were among those firms fined by the NASD’s disciplinary arm. NASD also suspended several firms from trading. The fines, spread across 10 firms, come to a total of $473,000. The fines and suspensions represent the latest chapter in the fallout from hot IPOs. Federal prosecutors and regulators are reportedly conducting a probe into how investment firms allocated shares of highly coveted IPOs to favored clients and others. The NASD market regulation department alleged that the firms were responsible for “locked and crossed markets.” None of the firms that agreed to the settlements admitted or denied the charges. A locked or crossed market is one in which orders can’t be executed as fast as they come in. The reason is that some brokers put in computerized “ask” price for a stock that is the same as or lower than the “bid” price coming in from another broker. The implication is that the brokers have agreed on the price. In these cases, the NASD said the fined firms locked and crossed markets during the initial trades for hot IPOs during the tech boom, between March 1, 1999 and June 15, 1999. The investigations of the market moves began shortly after June 15, 1999, according to NASD officials. Traders say a common trick is that brokers compare prices with each other via computer, stalling trading while they do so. The stalled trading, in itself, often increases demand, especially for a “hot” IPO. That causes some big problems: Investors don’t know what the real price of a stock is, and any trading in the stock is held up, freezing individual investors out of some profits. In addition, traders say, brokers may be tempted to inflate prices, sell the offerings short to investors and pocket the profits once the prices come crashing down again. Richard Wallace, chief counsel for the NASD’s Market Regulation Department, said of the fines: “I think it definitely shows we’re serious about enforcing the locked and crossed rule in connection with IPOs.” Vince Slavin, who tracks IPOs for Cantor Fitzgerald, welcomed the move. “It’s been a long time coming,” Slavin said of the NASD crackdown. “Nasdaq implemented rules of trading years ago not allowing [stocks] to trade in crossed markets. Why IPOs fell under the radar in that, I don’t know.” Slavin noted that locked and crossed markets consistently “created complete chaos and havoc on the openings” of hot IPOs. They also contributed to wildly inflated first day “pops,” traders said. NASD’s Wallace noted that the results of the investigation are coming out now because it has taken that time to comb through the various alleged instances of locked markets. The fined names were familiar ones. Besides Fleet and Schwab — which were fined $50,000 and $12,000, respectively — also fined were Herzog, Heine Geduld Inc. (a unit of Merrill Lynch & Co.) for $18,000 and Spear, Leeds & Kellogg (a division of Goldman, Sachs & Co.) for $10,000. The biggest fine went to NDB Capital Markets, a Jersey City, N.J.-based discount broker that will have to pay $250,000. NDB Capital Markets said its lead counsel was unavailable for comment. Five more firms were not only fined, but also suspended from trading any IPOs on their first day out. They were Access Securities Inc., Aegis Capital Corp., Dalton Kent Securities Corp., Ramius Securities, and Torrey Pines Securities. The suspensions range between 10 days and 30 days each. NASD’s Wallace noted that fines were determined by how many cases of locked markets were alleged against each broker. Wallace said there are no more IPO cases in the pipeline for NASD, either in the case of locked and crossed markets or otherwise. The reason: “IPOs have been pretty slow the past six to eight months, and so this pretty much wraps up our IPO matters,” he said. Wallace noted that, since the investigation period, there are NASD rules now in place to govern locked and crossed markets. Representatives for Fleet and Schwab refused to comment. The other firms couldn’t be reached for comment. Copyright (c)2001 TDD, LLC. All rights reserved.

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