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Hambrecht & Quist became the latest institution fined by NASD for taking excessive brokerage commissions on IPO shares. In a settlement announced Thursday, H&Q agreed to pay $6 million in penalties for alleged profit-sharing via the commissions — effectively a form of kickback for allocating hard-to-get IPO shares to customers. H&Q, now part of J.P. Morgan Chase & Co., neither admitted nor denied the charges. The NASD previously fined now-defunct Robertson Stephens & Co. $33 million in January for initial public offering allocations and took part of a $100 million fine Credit Suisse First Boston paid for the same kind of charges more than a year ago. “In general the fines have some proportionality to the extent of the excess commissions,” said Jay Ritter, a University of Florida finance professor. Ritter noted that H&Q was the lead manager on only 12 IPOs in the period NASD chose to investigate, while Robertson Stephens and CSFB underwrote dozens more. Because Chase Manhattan Corp. bought H&Q and J.P. Morgan in 2000, J.P. Morgan will pay the fine. The NASD said H&Q charged inflated commissions to 90 institutional and high-net-worth customers who requested and received shares of hot IPOs. In some cases, the NASD said in the settlement documents with J.P. Morgan, a normal charge of 6 cents per share on a trade was inflated up to $1.25 per share. Brokers sometimes also agreed with customers to share profits on the IPO shares. Settlement documents show that in one case the value of 15,000 IPO shares rose from $270,000 to $852,195 in a single day, the NASD said. On that account, H&Q requested commissions of $1 per share on the trades, earning $72,600 in commissions. If the commission had been at the usual 6 cents-per-share rate, H&Q would have earned only $4,356 on the same trade. At H&Q, bonuses for the sales teams hinged on commission revenues. The inflated commissions became apparent because the fees were always clustered around the date the IPOs started trading, the NASD said. The pattern was visible in 12 IPOs that H&Q underwrote between November 1999 and March 2000, the NASD said. In keeping with the pattern of regulatory investigations lately, e-mails appeared to be the chief documents that proved the case for the NASD. An H&Q sales broker wrote to a syndicate manager, for instance, that “[this customer has] a consistent pattern of rewarding the firm with commissions when they are given [IPO] stock and I anticipate they will do the same here.” One sales assistant bragged to her supervisor that she had charged a customer 50 cents per share for two trades, which earned her commissions of $142,500. In an e-mail the assistant wrote, “Can you tell I’m smiling … [Customer] has done it again!! My baby’s going to college!” There were also e-mails from H&Q’s compliance department expressing concern about whether some of the trading patterns were suspicious and noting that they would look bad for the firm. The NASD could not confirm if it was planning to fine other firms, because it does not comment on its investigations. But securities lawyers said other tech-focused underwriters would inevitably be next. While Ritter said he had no specific knowledge of other investigations, he said it would make sense for the NASD to continue its crackdown. “I would be amazed if H&Q, Robbie Stephens and CSFB were the only underwriters who had charged abnormally high commissions,” Ritter said. “In talking with hedge funds for the past couple of years, I haven’t heard any say that only these three investment banks were accepting extra commission dollars.” Copyright �2003 TDD, LLC. All rights reserved.

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