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The gargantuan class action suit charging Wall Street firms and their clients with illegally manipulating initial public offerings during the high-tech boom faces its first and possibly most critical test on Tuesday, when the parties will go head-to-head on seven motions to dismiss. Such motions are standard operating procedure in securities class actions, since fully a third of the time, the motions succeed and the claims are thrown out. But lawyers say that the sheer size of the case makes this ruling especially crucial. More than 300 complaints against 55 investment banks, one for each of 308 initial public offerings made between 1998 and 2000, are pending in the Southern District of New York before Judge Shira Scheindlin. The complaints comprise nearly two-thirds of the total number of securities class actions filed last year. The list of defendants reads like a Hall of Fame of the high-tech world, containing such well-known startups as VA Linux Systems, DoubleClick Inc., TheStreet.com and priceline.com, as well as powerhouse securities firms such as Goldman Sachs, Morgan Stanley and Credit Suisse First Boston, which dominated the market for high-flying IPOs. Potential plaintiffs easily number in the millions, and potential damages in the billions. In deciding the motions, Judge Scheindlin has an assortment of options available. She could dismiss the case in its entirety, although observers said such an outcome seems unlikely. Rather, she will probably rule which claims are viable and which parties are still in the suit. The judge has told lawyers in the case that she intends to supply a list of questions to each side sometime before Tuesday’s argument. It is believed that she has been reviewing the briefs since the motions were first made in early July. One lawyer close to the case said he did not think the argument would sway the judge’s opinion one way or the other, although the questions she asks could signal which way she is leaning. The ruling, however, could easily take months, because of the volume of documents to review. The pleadings alone amount to more than 11,000 pages, although much of it is repetitive. The papers filed by the parties for and against dismissal run well over 1,000 pages. Whatever Scheindlin decides, it is sure to be critical to the future course of the case. Barring an outright dismissal, the case will move to the discovery phase, which was on hold for the last year and a half pending the motions to dismiss. Lawyers for the plaintiffs said they were looking forward to the opportunity to dig into the defendants’ records and examine key employees. “If the underwriters remain in the case, they face an enormous problem because the damages are huge and we think we can prove the case,” said Frederick T. Isquith, a partner at Wolf Haldenstein Adler Freeman & Herz and member of the plaintiffs’ executive committee. In fact, settlement talks may well be the next step. In that event, the judge’s decision will inform each party as to the relative strength of its position, a key factor. Other than a failed mediation between the plaintiffs and the issuer defendants, the parties have yet to sit down to discuss settlement. Yet in the end, securities fraud class actions almost always settle, especially when the stakes are high, as here. The defendants “certainly wouldn’t want to have a jury decide these damages,” said Hillary Sale, a professor at the University of Iowa College of Law who is following the case. SUITS ALLEGE RIGGED IPOS The lawsuits center on charges that during the dot-com rush, underwriters routinely rigged IPOs by doling out shares to institutional investors, but only if they agreed to purchase more shares in the aftermarket at a higher price — a practice known as “laddering.” The suits claim that banks also manipulated the market by pressuring their analysts to promote the stock of their clients; charged investors excessive commissions; and illegally handed out shares of sought-after IPOs to corporate executives who reciprocated with investment banking business. All of these activities, the suits allege, should have been publicly disclosed under applicable securities laws. But because they were not, the allegation goes, banks were able to artificially inflate the market for these new stocks, drawing in unwitting outside investors. The fund managers would then get out, leaving individual investors holding the bag when the stocks later fell off their artificially created high. In their motions to dismiss, the defendants counter that the allegations are hopelessly broad and lack the specificity required by the securities laws. They argue further that even assuming the charges are true, there is no evidence investors lost money as a result. During the days of “irrational exuberance,” demand for high-tech IPOs would have been high regardless, and investors would have lost money in the inevitable downturn that followed anyway, they say. Gandolfo DiBlasi, a partner at Sullivan & Cromwell in New York and the liaison for the banks, and Jack C. Auspitz, a New York-based partner at Morrison & Foerster who heads the committee for the issuers, both declined to comment on the pending motions. When the complaints were first filed in early 2001, they were met with “an enormous amount of skepticism,” Isquith said. The initial complaints drew entirely from a series of Wall Street Journal articles reporting that the Securities and Exchange Commission and the U.S. Department of Justice were probing the way underwriters doled out shares of sought-after IPOs. Citing anonymously sourced news articles was “pushing the edge of the envelope,” one defense lawyer told the New York Law Journal at the time. Courts were not sympathetic either. Shortly after the complaints were filed, Senior Southern District of New York Judge Milton Pollack dismissed a related securities class action sua sponte without being formally asked, criticizing the complaints as “gross and unrestrained” and “a collection of market gossip.” Since then, however, a steady stream of headline-making government probes have given the lawsuits a huge boost in the arm. The first revelation came in January, when the SEC announced that Credit Suisse First Boston, a major underwriter of high-tech stocks, agreed to pay $100 million to settle charges that it illegally extracted excessive commissions of up to 65 percent from its customers in exchange for a piece of “hot” IPOs. Then in March, New York Attorney General Eliot Spitzer announced a probe of alleged analyst conflicts of interest at Merrill Lynch & Co. and other Wall Street firms. Spitzer has also sued six telecommunications executives for steering investment banking business to Citigroup Inc.’s Salomon Smith Barney unit in exchange for shares of IPOs. The House Financial Services Committee also launched an extensive review of IPO allocations and research practices at Salomon Smith Barney, Goldman Sachs and CSFB. These and other investigations have hurt the defendants “enormously,” said Melvyn I. Weiss, a partner at Milberg Weiss Bershad Hynes & Lerach who heads the plaintiffs’ executive committee. “Now they have litigation flourishing all over the country relating to these same activities.” “Is our case better than before? No. But we have more information and more credibility on Wall Street,” Isquith said. He added that he personally thought that the number of IPO laddering cases could be much higher, noting that in a related class action in which he is involved alleging antitrust violations by the banks, the plaintiffs list more than 800 IPOs they believe were subject to manipulation. “Almost all the investment bankers from top to bottom were engaged in this kind of egregious behavior,” Weiss said.

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