Billy, try spending 4 hrs with the SEC...its worse than your bull shit! Trust me.
>Mercury News
Authorities are raising questions about the tactics used by investment banks to allocate shares in initial public offerings during the recent IPO boom.
Three investment banks have confirmed that government authorities, including the Securities and Exchange Commission, have asked them for records showing how they allocated IPO shares to investors. The requests are an apparent bid to find out whether certain investors who paid extra-large trading commissions were doing so as hidden compensation to bankers giving them IPO shares.
The SEC, as is its custom, wouldn't comment, and the investment firms didn't elaborate.
In addition, at least two mutual-fund traders confirmed to the Mercury News last week that as the IPO bull market raged in 1999 and early 2000, some brokers at investment banks exerted pressure on them and other investors to commit to buying additional shares in the IPO company in later trading, as a condition of getting lucrative shares on IPO day. That practice, known as a ``tie-in'' agreement, is forbidden by securities rules.
The current questions follow a flap a few years ago over a longstanding practice by investment banks that sold IPO shares to executives at unrelated companies they wanted to take public. The bankers would buy and ``flip'' the shares for quick profits on the customers' behalf. The SEC investigated such ``spinning'' three years ago, ultimately deciding that it didn't clearly cross legal bounds, say people close to the agency.
It's not clear whether the current SEC inquiries will lead to a full investigation either, but investment banks Credit Suisse First Boston, Goldman Sachs & Co., and Bear Stearns Cos. have confirmed reports in the Wall Street Journal that they're giving authorities information about how they distributed IPO shares. The information includes: tape recordings of conversations between bankers and investors, records of certain large trades in 1999 and 2000 for which bankers got commissions over 10 cents a share, and a list of investors who got shares in certain IPOs.
``We believe that our allocation considerations are consistent with those employed by others in the industry,'' said a New York spokeswoman for Credit Suisse First Boston in a statement. ``We are cooperating fully with the governmental inquiries.''
Morgan Stanley Dean Witter, another investment bank identified by the Wall Street Journal as a probe target, declined to comment.
In addition, VA Linux, the Sunnyvale software company, confirmed that the SEC has asked it for information related to the underwriting process for its December 1999 IPO, led by Credit Suisse First Boston. That deal soared nearly 700 percent in its first day of trading. ``We don't think we're the focus, and we don't think it will affect our business,'' said VA Linux spokesman Patrick Fossenier.
High stakes
This year, it was hugely profitable for Wall Street to take companies public. Bankers earned a record $4.2 billion in fees doing 451 IPOs, according to Thomson Financial Securities Data. That's more than 1999's $3.75 billion, even though bankers brought more companies public then.
With so much money at stake, securities regulators have been worried that it's warped how investment bankers handle the IPOs.
``These questionable practices have always been talked about,'' said Richard Y. Roberts, an SEC commissioner from 1990 to 1995 who is now a lawyer with Thelen Reid & Priest. There was ``concern about some of the gamesmanship that was going on with regard to IPO allocations.''
The heightened scrutiny certainly indicates that Wall Street was pushing the envelope to make the most of the hot currency of IPO shares. But the question that investors will want answered as the probes continue is: Did such tactics improperly influence how the market behaved?
For instance, if some brokers were indeed giving stock only to investors who had agreed to buy additional shares later, it would have created a level of artificial demand -- and possibly driven up prices -- for stock in a market that strives for transparency and openness.
What's more, even if some investors were eager to pay higher future commissions as a way to get extra IPO shares, that could unfairly penalize mutual funds or others that didn't make such side deals by shutting them out of an IPO. Many pensions and mutual funds are forbidden by their boards of directors from paying extra-large commissions.
Bankers privately defend the right of some investors to boost future commissions to get IPO shares, saying that is a valid way for a tiny hedge fund or small investor to get on a preferred-customer list.
But, if a mutual fund group with many individual funds made such side deals, it could hurt investors in the funds that don't buy IPOs, said one fund trader.
``What the SEC's concerned with, and what we're concerned with, is that one class of shareholders is bearing the cost of higher commission rates, and another class may be enjoying the benefit of the hot IPOs,'' said John Wheeler, manager of equity trading at American Century mutual-fund company, who said he did not make deals to get IPO shares.
Despite the new scrutiny, regulation of IPOs has actually improved vastly from the early 1990s, experts and regulators said.
Back then, a seedy subset of the market operated freely as ``boiler rooms,'' exploiting the IPO envy of small investors by marketing them IPOs in thinly traded small stocks over the telephone. Unlike the big leagues, the boiler room rigged these IPOs against the investors: The unscrupulous brokers controlled all the shares of IPOs and forced investors who bought IPO shares to also buy more once the IPO started trading. That kept up an artificial demand for the shares, enabling the scamsters to cash out at steep profits. Once the jig was up, demand was gone and the stocks fell to Earth.
Boom begets greed
Boiler rooms have faded as regulators cracked down starting in 1996. But the sizzling IPO gains for the past several years has put regulators on alert for greed-driven excesses.
One such alert came in 1997, when the SEC launched an investigation into whether firms improperly used IPO shares to solicit business from corporations they wanted to take public or others with whom they wanted to do business. San Francisco-based firms Robertson Stephens and Hambrecht & Quist, now known as Chase H&Q, figured prominently in the investigation, after their executives freely discussed the practice with the Wall Street Journal. The SEC has taken no enforcement actions in that case, though the National Association of Securities Dealers reminded its members in late 1997 that allocating IPO shares to certain kinds of participants could violate NASD rules.
Robertson Stephens and H&Q defended the it as good business at the time, although some firms have since changed their practices.
Anti-competitive
In 1998, the NASD, investigating allegedly anti-competitive behavior by Prudential Securities during a bid to underwrite an IPO, sent out a reminder to its broker-dealer members not to inflate IPO fees by influencing competitors to keep their own fees high. Such influence could include ``conduct that threatens, harasses, coerces, intimidates,'' an underwriter trying ``to price its services competitively,'' the NASD said. Prudential consented to a $100,000 fine in that case without admitting wrongdoing.
Now investors are awaiting answers to the latest round of questions. ``There are a lot of practices over the years in this business that have been swept under the rug that are now starting to come to light,'' Wheeler said. ``And people are nervous.'' |
