SEC CHARGES CSFB WITH ABUSIVE IPO ALLOCATION PRACTICES; CSFB WILL PAY $100
MILLION TO SETTLE SEC AND NASD ACTIONS; MILLIONS IN IPO PROFITS EXTRACTED
FROM CUSTOMERS IN EXCHANGE FOR ALLOCATIONS IN "HOT" DEALS
The Commission today filed charges against Credit Suisse First Boston
Corporation (CSFB), the New York-based broker-dealer and investment
bank, for abusive practices relating to the allocation of stock in "hot"
initial public offerings (IPOs).
The Commission simultaneously announced that CSFB agreed to pay a total
of $100 million to resolve the Commission's charges and a related action
by NASD Regulation, Inc. (NASDR). CSFB also agreed to be enjoined from
future violations and to institute wide-ranging new procedures designed
to prevent a recurrence of the sort of misconduct that gave rise to this
action.
"In today's enforcement action the Commission has obtained one of the
largest civil penalties ever imposed against a broker-dealer," said
Stephen M. Cutler, Director of the SEC's Division of Enforcement. "CSFB
improperly took advantage of its position as underwriter by allocating
shares of hot IPOs to customers who agreed to share their IPO profits by
paying excessive commissions," he added.
In a complaint filed in U.S. District Court for the District of
Columbia, the Commission charged CSFB with violating certain conduct
rules of the National Association of Securities Dealers, Inc. (NASD)
which prohibit profit-sharing in customer accounts and unjust or
inequitable conduct. The Commission also charged that CSFB violated the
SEC's books-and-records requirements for broker-dealers.
"The Commission has taken the unusual step of seeking a federal court
injunction to enforce NASD rules in view of the nature and scale of the
misconduct alleged in the complaint," said Wayne M. Carlin, director of
the Commission's Northeast Regional Office. "In contravention of the
applicable rules, CSFB wrongfully obtained for itself tens of millions
of dollars of its customers' IPO profits."
The complaint, which will be available on the SEC's website, includes
the following allegations:
* CSFB, as the lead underwriter of hot IPOs for companies such as VA Linux
Systems Inc., Selectica, Gadzooks Networks, and MP3.com, had control over the
allocation of most of the shares in these IPOs. In exchange for some of the
highly-coveted stock in such hot IPOs, CSFB wrongfully extracted from certain
customers a large share of the huge profits those customers made in quickly
selling (or flipping) the IPO stock bestowed on them by CSFB.
* Specifically, CSFB allocated shares of IPOs to more than 100 customers
who, in return, funneled between 33 and 65 percent of their IPO profits to
CSFB. These customers typically flipped the stock on the day of the IPO,
often gaining tremendous profits. They then transferred a share of their
flipping profits to CSFB by way of excessively high brokerage commissions
(ranging from $0.19 per share to $3.15 per share - in contrast to the typical
rate of about $0.06 per share). The customers paid these commissions on
uneconomic, limited-risk trades in highly liquid, exchange-traded shares
unrelated to the IPO shares - trades that they effected for the sole purpose
of paying IPO flipping profits back to CSFB.
* The profit-sharing activity was pervasive at CSFB. Senior executives
who were in managerial and supervisory roles knew of the practices described
in the complaint, encouraged many of the practices described in the
complaint, directed CSFB employees to urge customers to maintain specified
ratios of commissions to IPO profits, and, in some instances, personally
engaged in some of the practices described in the complaint.
* CSFB employees informed the relevant customers, both implicitly and
explicitly, that they were expected to pay back to CSFB a portion of profits
earned on their IPO flipping in order to continue to receive allocations.
Customers who refused to funnel a portion of their profits to CSFB received
smaller allocations, and in some instances were denied allocations
altogether. The prevalence of CSFB's abusive practices is reflected in
numerous e-mail messages and other communications, examples of which are
cited in the complaint.
* The profit-sharing customers received no more than 10 percent of the IPO
stock allocated by CSFB in each offering. IPO flipping was so profitable,
however, that CSFB wrongfully obtained tens of millions of dollars in IPO
profits through this improper conduct.
"In the midst of the hot IPO market between April 1999 and June 2000,
CSFB extracted a significant sum of money from a relatively small
segment of the marketplace," Carlin said. "CSFB saw that some people
were willing to do just about anything to get IPO stock, and CSFB
improperly took advantage of the circumstances to take for itself a
share of its own customers' profits."
CSFB has agreed to settle this matter, without admitting or denying the
allegations in the complaint. The settlement terms are subject to
approval by the court.
CSFB has agreed to pay a total of $100 million to settle the
Commission's action and a related action announced today by NASDR.
Specifically, CSFB will pay disgorgement totaling $70 million. In
addition, CSFB will pay civil penalties and fines totaling $30 million.
CSFB has consented to be enjoined from violations of NASD Conduct Rules
2110 (prohibiting violation of just and equitable principles of trade)
and 2330 (prohibiting sharing in the profits of customer accounts), as
well as Section 17(a) of the Securities Exchange Act of 1934 and Rule
17a-3 thereunder (broker-dealer books and records).
Finally, CSFB has undertaken to change its methods of allocating IPO
stock, as well as its supervision of those activities. Among other
things, CSFB will (1) implement extensive new policies and procedures
relating to the allocation of IPO shares, the customer account opening
process, commission levels, and related supervisory practices; (2)
retain an independent consultant to conduct a review of CSFB's new
policies and procedures after one year; and (3) adopt the
recommendations of the independent consultant.
"This matter was a model of effective cooperation and parallel
investigation by our staff and the staff of NASDR," Cutler said. "We
are most grateful for NASDR's extraordinary work on the enforcement
actions announced today."
The Commission also acknowledged the invaluable assistance provided by
the Office of the United States Attorney for the Southern District of
New York in the investigation of this matter. [SEC v. Credit Suisse
First Boston Corporation, 02 CV 00090, RWR, D.D.C.] (LR-17327; Press
Rel. 2002-14) |
