Fines, Findings May Bring IPO Case to a Head


NEW YORK - It has been the coldest quarter in recent memory for initial public offerings. So it's fitting that IPO-related settlements and litigation are heating up again.

Today, the NASD, formerly the National Association of Securities Dealers, fined J.P. Morgan Securities $6 million for unlawful IPO profit sharing at its tech-focused investment bank unit Hambrecht & Quist. The fine concerns inflated commissions charged to more than 90 customers from November 1999 to March 2000, just as Chase Manhattan was closing its purchase of the San Francisco-based firm. Chase bought J.P. Morgan in the summer of 2000 to become J.P. Morgan Chase.

As customary with most recent settlements, J.P. Morgan neither admitted nor denied the allegations, but consented to the entry of findings.

According to the NASD, H&Q was a top manager of 12 IPOs over that time period. To boost its margins on allocations, H&Q would hike commissions on unrelated trades as a way to collect on the outrageous profits initial IPO holders gained by flipping their shares in a hot market, the NASD alleges.

For example, the NASD points to a trading day that generated $590,000 in commission revenue. The next day, when an H&Q-led IPO began trading, the firm billed $2.2 million. Even on some of its biggest offerings--say, the 3.3 million shares of eMachines that H&Q distributed on March 23, 2000--a standard commission of 6 cents per share could hardly make up the difference.

To further rub salt in J.P. Morgan Chase's wounds, a company that was hurt last year by its overexposure to rotten tech and telecom debt, the NASD quoted one sales assistant as saying, "My baby's going to college!" after pulling off two trades with a 50 cents per share commission.

The regulator even pointed to an internal e-mail from H&Q's compliance department warning about investors making wash trades to pony up on higher commissions. A customer would buy non-IPO-related shares at a high commission and sell shares of the same company through another broker. Such offsetting trades were done purely to reward the IPO-offering bank, the NASD said. Credit Suisse First Boston, the investment banking unit of Credit Suisse Group, was probed for similar practices by the U.S. Securities and Exchange Commission and the NASD. In January 2002, CSFB was fined $100 million.

In December, state and national regulators wrestled a $1.4 billion settlement from top investment banks for trading improprieties and conflicts of interest during the late 1990s. Citigroup agreed to pay $400 million; Merrill Lynch and CSFB each paid $200 million while J.P. Morgan Chase paid $80 million.

But the door to even more settlements opened wider yesterday when Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York allowed an IPO class-action complaint against 55 underwriters and 309 issuing companies to proceed to discovery. The banks were pushing to dismiss the case.

Scheindlin, in reviewing the claims, determined that "plaintiffs have pled a coherent scheme by underwriters, issuers and their officers to defraud the investing public. As such, these lawsuits may proceed."

The class-action lawyers' own discovery, mixed with forthcoming findings from state and national regulators, should put major investments banks back at the bargaining table. Unlike dealing with regulators, whose job is to protect both sides of the market, the investing public and its lawyers won't be so gentle.

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