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A $1 billion partial settlement was announced Thursday in hundreds of securities fraud lawsuits filed in Manhattan against technology companies over misrepresentations in initial public offerings. The terms of the settlement, revealed at a morning news conference by plaintiffs’ attorneys — including Melvin Weiss of Milberg Weiss Bershad Hynes & Lerach and Stanley Bernstein of Bernstein Liebhard & Lifshitz — resolve investor claims against 309 technology companies. The companies went public during the stock market boom of the 1990s, and their stock price collapsed amid the general meltdown on Wall Street that began in spring 2000. Not included in the settlement are 55 investment banks that handled the initial public offerings. The banks suffered a setback in February when federal Judge Shira Scheindlin of the Southern District of New York rejected their motion to dismiss the case, In re: Initial Public Offering Securities Litigation, 21 MC 92. The shareholder suits, which were consolidated before Scheindlin to coordinate and decide pretrial motions and discovery, charged that investment banks and technology companies artificially inflated the stock price for hundreds of initial public offerings between January 1998 and December 2000, the peak of the Internet boom. The plaintiffs claim that the price of stock in initial offerings was driven higher by several factors, including “tie-in agreements” in which the banks 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. Plaintiffs also claimed that the banks own compensation from the offerings, as well as conflicts of interest involving their analysts, were concealed. Issuing companies allegedly exploited the inflated stock prices 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. Scheindlin, in a 238-page opinion issued in February in which she refused to dismiss the suits, said: “In sum, Plaintiffs have pled a coherent scheme by underwriters, issuers, and their officers to defraud the investing public.” FLOOR FOR RECOVERY The settlement, reached after a year of mediation overseen by former U.S. District Judge Nicholas Politan of New Jersey, essentially establishes a floor for recovery by investors that is set against any damages they might receive in the ongoing case against the investment banks. Investors will receive a minimum of $1 billion, and should they receive more than $5 billion from Goldman Sachs Group and the other investment banks, the insurance companies and the issuers would be entitled to recoup “various expenses,” Weiss said. Those expenses might include some lawyers fees, said Bernstein, who along with Weiss was designated plaintiffs’ liaison counsel by Judge Scheindlin. A key part of the settlement, Bernstein said, was “that the issuers are assigning to investors many of their claims that they have against the investment banks.” Those claims are “primarily excess compensation claims,” he said. “Banks customarily charge 7 percent investment fees on top of proceeds, but the banks were inducing investors who received IPO allocations to kick back to the investment banks a portion of the profits that were earned from the IPOs,” Bernstein said. “These profits essentially earned the banks far greater than the 7 percent they were representing to issuers they were charging.” Another benefit for the plaintiffs, Bernstein said, was that the issuers, once defendants in the action, are now obligated to provide information to the plaintiffs and cooperate in the discovery process. Although lawyers for the issuing companies declined to discuss the negotiations in detail, they acknowledged that there were good reasons for the extended talks. “This is the most complex securities litigation I think that’s ever been filed, over a thousand defendants and more than 300 separate class actions filed and consolidated before Judge Scheindlin,” said Jack C. Auspitz of Morrison & Foerster, liaison counsel for the issuing tech companies. “The settlement process has been equally complex.” Gandolfo V. DiBlasi of Sullivan & Cromwell, liaison counsel for the defendant underwriter banks, could not be reached for comment. The settlement was presented in the form of a memorandum that must still be reviewed by the issuing companies and then submitted to Judge Scheindlin for approval.

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