Morgan Stanley and Goldman Sachs Group Inc., two of Wall Street's largest firms, tentatively agreed to pay $40 million each to settle Securities and Exchange Commission allegations that they handed out shares in new companies in a manner that artificially pumped up share prices, sources familiar with the deal said Tuesday.
The settlements are still being worked out, and it could be weeks or months before they are announced. Morgan Stanley has not yet agreed to specific language that would describe its alleged conduct in the SEC complaint, the sources said. As is customary under such as settlement, neither company would admit or deny wrongdoing.
The proposed settlements are the latest results of an industry-wide investigation into a variety of practices that Wall Street firms were accused of using to keep prices of new technology stocks rising in the late 1990s. Between them, Morgan Stanley and Goldman shepherded more than three-quarters of the technology initial public offerings during the period under investigation.
These settlements would specifically address accusations of "laddering," a practice in which firms allegedly handed out IPO shares to buyers who promised to buy more shares at higher prices once the stocks began trading publicly. The point of the commitment for follow-up purchases was to put additional upward pressure on prices, according to regulators. IPO shares were highly valued in the years before the bubble burst because new stocks routinely doubled or tripled in price in their first few days on the market.
The Goldman and Morgan Stanley settlements are not expected to allege specific quid pro quos or an institutionalized system for extorting future purchases, said the sources, who asked not to be identified because negotiations are ongoing. Rather, the settlements are more likely to allege the firms violated a general rule that prohibits market manipulation. The tentative settlements were first reported Tuesday by the Wall Street Journal.
In October 2003, another firm, J.P. Morgan Chase & Co., paid $23 million to settle allegations of violations based on similar issues. The SEC alleged in that case that the firm, which handled far fewer IPOs than Morgan Stanley and Goldman, pressured recipients of hot IPO shares to buy more shares in the public market.
A Morgan Stanley spokeswoman declined to comment for this story, and Goldman spokesman Lucas van Praag said the firm has a policy of not commenting on ongoing regulatory matters. Both firms have previously disclosed that they had been warned that the SEC staff intended to recommend such charges.
SEC spokesman John Nester declined to comment.
The SEC's laddering investigation has been highly controversial on Wall Street. Some investment bankers say that they need to talk to potential IPO purchasers about their long-term plans in order to price offerings properly and to help the newly public companies find shareholders who will be stable, long-term investors rather than flippers who sell out immediately for a quick profit.
Several firms, including Morgan Stanley, have paid to settle other allegations of wrongdoing in their handling of IPOs, including accusations that they either demanded or accepted abnormally high trading commissions from institutional clients that received hot IPO shares. The SEC also has been investigating the practice of "spinning," in which Wall Street firms would give hot IPO shares to high-ranking corporate executives in hopes of winning investment banking business.