A federal judge granted preliminary approval yesterday of a $1 billion settlement of lawsuits accusing scores of companies that went public during the Internet boom of rigging their stock offerings to defraud investors.
The settlement, reached in June 2003, resolves legal claims that 298 start-ups including CNET Networks Inc. and Corvis Corp. conspired with 55 investment banks to drive up shares in their initial public offerings. Investors' claims against banks such as Goldman Sachs Group Inc. and Credit Suisse First Boston are pending.
If investors succeed in recovering more than $1 billion from the banks, the Internet companies won't have to pay anything under the accord. The ruling by U.S. District Judge Shira A. Scheindlin in New York may increase pressure on the banks to settle.
The judge "made it very clear that this is just a foundation for the rest of the case" against the banks that underwrote the IPOs, said Melvyn I. Weiss, lead lawyer for millions of investors covered by the class-action cases.
Scheindlin noted in her 52-page opinion that the Internet start-ups agreed to aid investors in lawsuits against the banks. "The value of 298 willing allies in litigation, as opposed to the specter of hundreds of uncooperative opponents, is significant," she wrote.
A lawyer for the banks, Gandolfo V. DiBlasi, didn't immediately return calls. A lawyer for the Internet companies, Jack Auspitz, didn't have an immediate comment.
Individual Internet companies have agreed to pay between $110,000, as in CNET's case, to the $17 million Corvis has pledged. Investors' average recovery is $.087 per share, Scheindlin said.
"Despite the apparent magnitude of the billion-dollar guarantee, this settlement is not solely -- or even primarily -- about monetary recovery," Scheindlin said.
The judge said the real value is in the companies' agreement to aid the investors' suits against the banks. The start-ups also agreed to allow investors to file suits to pursue the companies' claims that the banks didn't raise enough money in the IPOs.
"The value of each of these benefits should not be understated," Scheindlin wrote. The Internet companies "know far better than the plaintiff classes precisely what occurred in the period leading up to and including their IPOs."
In the lawsuits, investors who bought shares after trading began say banks had secret deals requiring their clients to keep buying as prices rose, creating artificial demand until the stocks eventually collapsed.
Recipients of IPO shares had to kick back some profits to brokers, and the banks failed to reveal those secret payments, the plaintiffs claim in their suits.