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Over the next few weeks, the 322 technology companies being sued in federal court over their initial public offering allocation processes are likely to breathe sighs of relief as they move closer to settling the cases. But the investment banks that underwrote their IPOs will not be so lucky. That is because on Monday, U.S. District Judge Shira A. Scheindlin, of the Southern District of New York, agreed to let the companies, which are defendants, enter mediation talks with the plaintiffs — mostly individual investors — who are bringing the suits. But the 48 underwriters also named as defendants will not be included in the talks. That means that if the mediation leads to a settlement, it will concern only the issuers. And the underwriters, which include big firms such as Credit Suisse First Boston, Goldman, Sachs & Co. and Robertson Stephens Inc., could be forced to pay out millions of dollars in damages, without the issuers’ help. The class actions, filed nearly a year ago, charge that Wall Street underwriters and hundreds of the companies they took public defrauded investors by manipulating the allocation of shares in hot IPOs in 1999 and 2000. The mediation will “consolidate our approach against the issuers — maybe even settling against them,” said Melvyn Weiss, a name partner of Milberg Weiss Bershad Hynes & Lerach and the leader of the plaintiffs’ executive committee in the cases. His comment, made in court Monday, was the first hint that the raft of IPO cases may be moving toward a settlement. The mediation talks will take place for two days next week, according to Weiss. U.S. District Judge Nicholas Politan, who is based in Newark, N.J., will oversee the talks, Weiss said. Not surprisingly, lawyers for the underwriters were displeased by talk of mediation at Monday’s court hearing. Vince DiBlasi, a partner with Sullivan & Cromwell and the liaison between the court and all of the underwriters’ lawyers, opposed the idea of the issuers mediating alone with the plaintiffs. DiBlasi said the underwriters “do not believe it is appropriate” for Judge Politan to mediate talks between the issuers and the plaintiffs while the issuers are still named as defendants in the cases under Judge Scheindlin. In response, Judge Scheindlin said the underwriters could attend the mediation meetings. They must await the result of the mediation, like many outside observers. They are, however, expected to file a motion to dismiss all the cases at the next scheduled meeting of the judge, the plaintiffs and the defendants on May 23. FOLLOWING THE MONEY By more aggressively pressing their case against the underwriters, the plaintiffs are simply following the money. Many of the technology companies named in the suits are now broke, while underwriters, however much they have suffered in the economic downturn, have money on hand. “There’s not much left of [the tech companies] at this point,” said Laura Simmons, co-author of a recent Stanford Law School and Cornerstone Research study on settlements in securities class actions. “They’re trading at pennies and the underwriters are certainly very big. The underwriters have more at stake than many of these companies.” Added Columbia Law School Professor Jack Coffee, “The issuers do not have nearly the same liability as the underwriters.” That is because issuers are much more likely to be perceived as the victims in the IPO suits, regardless of whether that perception is accurate. Professor Coffee said, “If there was a manipulation of the market, then the underwriter has sold the issuer’s stock too cheaply. That means the company has gotten too little money. Then the company is in the position of saying, ‘if there was any wrong here, we were the ones who were injured.’” The Stanford-Cornerstone study, by Simmons and John Gould, shows that when an underwriter is named as a defendant in a securities class action, a settlement can be as much as 9.6 percent of all damages claimed. In contrast, when no underwriter is named, a securities class-action settlement usually ranges around 4.8 percent of the damages sought. Two Cornerstone studies show that NASDAQ-traded companies made up 75 percent of all the companies named in class action lawsuits in 2001. Technology had the single greatest run-up for any sector, with 32 percent of all filings. And the average market cap loss for companies named in 2001′s class action lawsuits was $6.3 billion per company. One could argue the averages were skewed by “mega” losses among 27 companies that lost $10 billion or more each. Even so, the median market cap loss was still $1.2 billion in 2001 for any company named in a class action lawsuit. Cornerstone also found that the average settlement size increased from 2000 to 2001. The average class action in 2001 settled at $16 million, compared to $10 million in 2000. That means 2001 was bleak for underwriters that settled class actions. But the numbers do not indicate what could happen in 2002 or 2003, since the study of 2001 settlements emphasized cases against a single company or investment bank. In the 300-plus IPO allocation lawsuits in federal court, “the underwriters are going to want to settle 100, 200, 300 cases,” Gould said. “An underwriter cannot settle one of these cases without having in mind what to do with one of the others.” In addition, many of the cases settled in 2001 included accounting irregularities, as securities class actions often do. And the implications of those cases are vastly different from the scale of the IPO allocation cases. In the end, Simmons and Coffee agreed the IPO allocation lawsuits will blaze their own path in settlement size. “There is no database for what these IPO allocation cases would settle at,” Coffee said. Simmons agreed. “We don’t really know yet because we haven’t seen these settle,” Simmons said. “These studies would not be necessarily helpful when it comes to the IPO allocation lawsuits.” Copyright (c)2002 TDD, LLC. All rights reserved.

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