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A major hurdle was cleared Wednesday by investors who filed hundreds of lawsuits claiming that investment banks and technology companies artificially inflated the stock price for hundreds of initial public offerings during the peak years of the stock market boom. Southern District of New York Judge Shira A. Scheindlin rejected motions to dismiss made by 55 underwriters and 309 companies whose stock was brought to market for the first time between January 1998 and December 2000. “In sum, Plaintiffs have pled a coherent scheme by underwriters, issuers, and their officers to defraud the investing public,” Scheindlin wrote in a 238-page opinion. “As such, these lawsuits may proceed.” The shareholder suits consolidated in In re: Initial Public Offering Securities Litigation, 21 MC 92, charged that the price of stock in initial offerings was driven higher by a scheme that included concealed tie-in agreements, analyst conflicts and compensation pacts. The suits charge that investment banks, in the tie-in agreements, required major investors who wanted to participate in hot IPOs to agree to purchase stock at increasingly higher prices, or agree to do the same in another offering. Issuing companies exploited the inflated stock price by engaging in mergers and acquisitions or making new offerings, the suits charge, and individual officers gained personally by quickly cashing out of the inflated stock. The suits also charge that investors granted IPO allocations gave kickbacks to investment banks in the form of inflated commissions, or new commissions from agreements to buy unrelated stock. The cases, more than 1,000 in total, were assigned to Judge Scheindlin to coordinate and decide pretrial motions and discovery. Under the Private Securities Litigation Reform Act of 1995, discovery was stayed in the actions until the motions to dismiss were decided. A conference in the case is set for March 5. “Now we are finally going to get into the books and records and what I refer to as the bowels of the investment bankers’ marketing activities,” Melvyn Weiss of New York-based Milberg Weiss Bershad Hynes & Lerach said Wednesday. Weiss, one of the plaintiffs’ liaison counsel in the cases, said: We will “start seeing for the first time how the manipulations in the complaint worked.” He added that plaintiffs’ attorneys will now be able to find out other things, such as possible manipulations of the ask-and-bid prices on some offerings. Although one plaintiffs’ lawyer in the billion-dollar case said Wednesday that the judge’s decision might spur settlement meetings, there have been no substantive talks with underwriters. An attempt last year at mediation between issuers and the plaintiffs was unsuccessful. “If they don’t want us in there looking at all this material, they will start knocking on our door,” Weiss said. Taking the facts as alleged in the complaints as true, Judge Scheindlin said Wednesday that the shareholders in the vast majority of cases had met their burden at the pleading stage. “Where insiders conspire to frustrate the efficient functions of the securities markets by exploiting their position of privilege, they have perpetrated a double fraud: they have manipulated the market, and they have covered up that manipulation with lies and omissions,” the judge said. “When investors have been injured by these frauds, those insiders may be liable under the securities laws.” The judge’s opinion dealt with six claims common to the lawsuits. Three of the claims brought against all categories of defendants — the banks, the issuing companies and individual defendants — involve making false statements in the company’s registration statement and prospectus in violation of both � 11 of the Securities Act of 1933 and � 10(b) of the Exchange Act of 1934. The individual officers are also accused of controlling the issuing companies that made the false statements in violation of � 15 of the 1933 act, and controlling the issuers in violation of � 10(b) of the 1934 act, which is also a violation of � 20 of the 1934 act. Finally, the underwriting banks that allocated the stock are accused of violating � 10(b) by scheming to manipulate the securities market. The defendants responded by moving to dismiss, claiming that the plaintiffs failed to state a claim, and that they did not satisfy the pleading requirements of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995. Although Scheindlin allowed most of the claims against most of the defendants to proceed, she dismissed claims brought pursuant to Rule 10b-5 under the 1934 act — which prohibits making material misstatements or omissions in registration statements — against a number of the individual defendants. She said the defendants did not sign the registration statements. Other individual defendants sold only a small portion of their stock following the IPO, she said. And she dismissed Rule 10b-5 claims against a number of issuers who made acquisitions after a certain date. Other claims against some issuers and individual defendants were dismissed because of the plaintiffs’ failure to allege an intent to defraud. FIRST-IMPRESSION ISSUE The judge also decided an issue of first impression in the courts of the 2nd Circuit when she dismissed the � 11 false statement claims of those plaintiffs who sold stock above the offering price. Judge Scheindlin said the plain language and the legislative history show that “a plaintiff who sells a security above its offering price has no cognizable damages under Section 11 of the Securities Act, notwithstanding the fact that such a plaintiff may have actually suffered a loss.” Liaison counsel for the plaintiffs are Weiss, Robert Wallner and Ariana J. Tadler of Milberg Weiss, and Stanley Bernstein and Robert Berg of New York-based Bernstein Liebhard & Lifshitz. Liaison counsel for defendant underwriters are Gandolfo V. DiBlasi and Penny Shane of New York-based Sullivan & Cromwell. Liaison counsel for the defendant issuers are Jack C. Auspitz and Matthew M. D’Amore of Morrison & Foerster’s New York office. Counsel for certain issuer defendants is Nina F. Locker of Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif.

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