IPO commissions probed
Investors reportedly asked to pay up for shares
By Steve Gelsi, CBS.MarketWatch.com
Last Update: 2:24 PM ET Dec 7, 2000 NewsWatch
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NEW YORK (CBS.MW) -- Federal regulators reportedly are probing whether sales people at big investment banks sought inflated commissions in return for shares of hot initial public offerings.
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Updated:
12/13/2000 4:18:26 PM ET
The Securities and Exchange Commission, along with the U.S. Attorney's Office in Manhattan, is investigating how IPO shares have been allocated to investors, who may have been asked for unusually large trading commissions, The Wall Street Journal reported Thursday.
With the probe in its early stages, a federal grand jury has been called to consider evidence, the report said.
Representatives of the U.S. Attorney's Office declined to comment. Securities and Exchange Commission spokespersons weren't immediately available to comment on the report.
One possible scenario under investigation is whether formulas were used to determine commissions based on investors profits in IPOs.
The probe is focusing on IPOs in late 1998 and early 1999 when issues typically doubled or tripled on the first day of trades.
Such IPOs were highly sought after by institutional buyers of stock, who may have been asked for a percentage of their profits on the deals by representatives of the banks that underwrite the IPOs.
In a prepared statement, Credit Suisse First Boston confirmed it has been asked for information about allocation of shares in IPOs. "Such allocations can be based on a variety of considerations, such as an investor's interest in the issue, its demonstrated knowledge of the issuer and the industry, and the nature and extent of an investor's brokerage relationship and trading activity," the investment bank said.
The bank added, "We believe that our allocation consideration are consistent with those employed by others in the industry. We are cooperating fully with the governmental inquiry."
Allocation process
Shares of initial public offerings are finite, yet during the bull market in the past year or so, everybody wanted them.
Underwriters such as Goldman Sachs, Morgan Stanley and CS First Boston typically organize road shows with fund managers and other institutional investors to drum up interest for IPO shares ahead of their debuts.
It's a process that favored larger players in the game - pension funds, mutual funds and others that pay the largest commissions.
The investors are able to buy the IPO shares at their offering price. When the stocks open for trading, the price during the bull market often doubled or even tripled, delivering a massive profit.
The Journal reported that these rules had changed over the past couple of years. Some investors were willing to share their IPO profits and thereby bought their way into hot IPOs through oversized commission payments.
The inquiry focuses the spotlight on one of Wall Street's biggest moneymakers during boom times. Since the middle of 1998, IPOs have raised about $166 billion in capital and yielded about $8.7 billion in fees for Wall Street firms, according to Thomson Financial Securities Data. |
