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Credit Suisse First Boston settled a regulatory probe into how it allocated shares in “hot” initial public offerings at a cost of $100 million to the investment banking firm. “CSFB improperly took advantage of its position as underwriter by allocating shares of hot IPOs to customers who agreed to share their IPO profits by sharing excessive commissions,” Securities and Exchange Commission Director of Enforcement Steven Cutler said in a statement. The SEC and the National Association of Securities Dealers Inc., which had conducted the two inquiries, will take about $30 million of the total as a civil penalty. About $70 million of the settlement will go towards paying the NASD and the U.S. Treasury for what the Securities and Exchange Commission called CSFB’s “ill-gotten gains” from the IPO allocation problems. CSFB neither admitted nor denied any wrongdoing, which is customary in SEC settlements. The IPO allocation probe casts a cloud over the investment banking firm. Numerous private lawsuits seeking class-action status were filed against CSFB and several other underwriters and new issuers in connection with the allocation of shares in hot, mostly technology-related IPOs. CSFB dodged one bullet late last year when the U.S. Attorney’s Office in Manhattan said there would be no criminal charges in connection with the IPO scandal. Still, “The magnitude of the settlement certainly indicates serious concern about what went wrong and a willingness to take a financial toll that causes some pain,” said Harvey Goldschmid, the Dwight professor of law at Columbia Law School and a former SEC general counsel. “It also creates what is most healthy in this area, which is deterrence in the future.” Still, the bank did not get off easy. The SEC charged CSFB with violating NASD rules that prohibit sharing in customers’ profits from their accounts. The agency also charged the bank with violating its books-and-records requirements. In addition, CSFB fell afoul of NASD rules regarding unjust or inequitable conduct, said the director of the Northeast region for the SEC, Wayne Carlin. Goldschmid noted that the SEC’s language in the complaint was unusually strong. Still, the SEC did not file securities fraud or allegations of misleading statements against the investment bank. “That’s clearly what they were bargaining for — to avoid a … fraud allegation,” Goldschmid said. Still, the complaint itself contains colorful language from CSFB employees. The 16-page complaint quotes a sales trader telling a customer: “OK, we got another screaming deal and I weasled you guys some stock we’ve yet to see any leverage out of your guys for the free dough-re-me does it make sense for me…to continue to feed your guys with deal stock or should I take the stock to someone who will pay us direct for the allocation.” The complaint also alleges that employees in one business unit were “specifically told that they were expected to pay back 50 percent of their profits to CSFB in order to receive IPO allocations.” The complaint continued that the unit “aggressively enforced the 50 percent requirement, which was later increased to 65 percent. Customers who refused to increase their payments to CSFB were cut off from IPO allocations.” The SEC described the scope of CSFB’s wrongdoing: Between April 1999 and June 2000, “CSFB employees allocated shares of IPOs to over 100 customers who were willing to funnel between 33 percent and 65 percent of their profits to CSFB.” The profits came to CSFB in the form of excessive brokerage commissions, the SEC complaint said. More importantly, the SEC contended that the improper IPO allocations were a pervasive, firm-wide practice. “CSFB managers and employees actively participated in profit-sharing practices,” the complaint noted, mentioning “senior executives in managerial and supervisory roles.” That’s a departure from the signal sent by CSFB’s firing of three of its brokers in June. A lawyer connected to the brokers said that the alleged conduct was incorrectly attributed to individuals and that the SEC complaint noted that any wrongdoing in regard to IPO allocations was a firmwide practice. The SEC has also received an injunction preventing CSFB from making the same IPO allocation mistakes in the future. Regarding the fired brokers, John Sturc, a partner with Gibson Dunn & Crutcher in Washington, D.C., and a former SEC official, said, “You shouldn’t assume that this is the end of the story.” Copyright (c)2002 TDD, LLC. All rights reserved.

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