Word of CSFB Settlement Rocks Wall Street
Tuesday December 11, 5:08 pm Eastern Time
By Brian Kelleher and Elena Molinari
NEW YORK (Reuters) - Credit Suisse First Boston reportedly will pay $100 million to settle federal charges that it mishandled hot stock offerings during the final days of the 1990s bull market, setting the stage for other Wall Street firms to follow suit.
The settlement may provide the thousands of individual investors that sued dozens of investment banks alleging fraud in the way they doled out IPO shares with additional ammunition, although it does not set a formal legal precedent, security law experts said.
CSFB, a unit of Swiss financial services giant Credit Suisse Group Inc. (NYSE:CSR - news), will settle an investigation into whether it charged big customers extraordinarily high trading commissions in exchange for shares of high-flying initial public offerings, the Wall Street Journal reported on Tuesday, citing people familiar with the matter.
The investigation also focused on whether Wall Street firms required rich customers to buy more IPO shares on the first day of trading to guarantee a newsmaking jump in the stock price. The probe involves many of Wall Street's biggest firms, and has resulted in a flood of civil law suits by disgruntled investors.
The plaintiffs in these suits, mainly individual investors who are seeking class-action status for their lawsuit, may benefit from the settlement.
``The settlement doesn't imply a formal finding of liability,'' said John Coffee, professor of Law at Columbia University. ``But may subjectively influence the court, which may not want to dismiss a case that has already been deemed as nonfrivolous.''
A CSFB spokeswoman declined to comment on the matter, and spokespersons for the U.S. Securities and Exchange Commission and the regulatory arm of the National Association for Securities Dealers -- which were reported to be negotiating with CSFB on a settlement -- declined to comment. But one CSFB source told Reuters the company and regulators have not yet signed anything definitive.
CSFB rivals including Goldman Sachs Group Inc. (NYSE:GS - news), Morgan Stanley (NYSE:MWD - news), and Citigroup Inc. (NYSE:C - news) unit Salomon Smith Barney are also under investigation and are being targeted in the more than 1,000 IPO-related lawsuits.
``The issue is not dead yet for the other firms,'' said Dave Trone, an analyst at Prudential Securities.
If CSFB announces a settlement -- which the newspaper said should come by the end of the year -- it could prompt the other firms to follow suit and avoid the negative publicity of a prolonged investigation, Trone said.
``There will be a few more settlements, (but) not of that magnitude,'' assuming the $100 million figure is accurate, Trone said. In 2000, CSFB managed more IPOs than any other firm, 92 in all, according to research firm Thomson Financial Securities Data.
Representatives for Goldman, Morgan Stanley and Salomon declined to comment.
PLAINTIFFS SAY CSFB SETTLEMENT WILL HELP THEIR CASE
Forty-two Wall Street firms and 263 companies have been named as defendants in more than 1,000 lawsuits that allege the investment banks and the companies they brought public artificially pumped up prices of newly issued shares, according to documents filed in U.S. District Court for the Southern District of New York.
The plaintiffs in the civil litigation believe the CSFB settlement will help their case. ``It will surely have a strong psychological effect,'' said Milberg Weiss, partner in the New York law firm Milberg Weiss Bershad Hynes & Lerach, likely to be appointed as lead counsel for the plaintiffs in the civil litigation. ``It is one of the highest fines in the history of Wall Street. Everybody can see that there must be a reason.''
CSFB and its Wall Street rivals rode the tech wave of the late 1990s and early 2000 to capitalize on an insatiable demand for tech IPOs, pulling in billions of dollars in underwriting fees and shattering previous profit records.
The settlement will likely pave the way for new rules governing the allocation of IPOs, the Journal reported. Stricter rules won't have much of an effect until the IPO market recovers.
``It's a moot point until you see a red-hot IPO market again,'' Trone said.
CSFB's tumultuous 2001 was marked by the ouster of Chief Executive Allen Wheat and the dramatic decline in revenues from its stock underwriting and merger advisory businesses. CSFB is cutting bonuses and 2,000 jobs under new CEO John Mack to cope with the revenue decline.
When CSFB hired Mack -- formerly president of Morgan Stanley -- in July, it contended that his appointment had nothing to do with the IPO probe. But on Wheat's watch, CSFB ran afoul of Swedish and Japanese regulators, prompting some to take note of what they considered to be the firm's lax controls and its reputation for giving executives a lot of leeway.
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