The issue of how Wall Street doled out coveted initial public offering shares during the market boom of the late 1990s reverberated on two fronts Wednesday, as a federal judge approved several class-action lawsuits over alleged IPO abuses and the Securities and Exchange Commission proposed new rules designed to clean up the process.
In New York, U.S. District Judge Shira A. Scheindlin ruled that 55 investment banks, including Wall Street's biggest and richest firms, must face at least six class-action suits over charges that they used IPO allocations to artificially inflate stock prices during the market boom.
Scheindlin selected six cases out of 310 filed by investors who claim that investment banks schemed with companies issuing stock in the late 1990s to manipulate prices in ways that enriched corporate executives and Wall Street insiders but left average investors with huge losses after the stock bubble burst. She said she might eventually certify all 310 cases.
Scheindlin rejected arguments from the banks that investors should pursue their claims individually, saying it would be financially impossible for investors to do so, undermining the purpose of class-action suits.
"In their zeal to defeat the motion for class certification, defendants have launched such a broad attack that accepting their arguments would sound the death knell of securities class actions," Scheindlin wrote. "Trying these cases will be an arduous task, but that is no reason to close the courthouse door to the alleged victims of a sophisticated and widespread fraudulent scheme."
The six cases Scheindlin approved were filed by investors who bought shares between 1998 and 2000 in Corvis Corp., now known as Broadwing Corp.; iXL Enterprises Inc.; Sycamore Networks Inc.; VA Software Corp., formerly known as VA Linux Systems Inc.; and Firepond Inc.
The investors argue in their lawsuits that the banks engaged in several manipulative practices, including requiring recipients of coveted IPO shares to buy more shares later on the open market at a higher price, a practice known as laddering. They also claim that the investment banks demanded inflated commissions from recipients of IPO shares and that analysts at the banks misled investors by issuing overly bullish stock research on the companies going public.
Melvyn I. Weiss, chairman of the committee of lawyers representing investors and a senior partner at Milberg Weiss Bershad & Schulman LLP of New York, hailed the ruling as major win for investors who lost money on technology stocks. But he said trying the cases could take several years because of the complexity of the issues involved, the massive trove of documents that must be reviewed and the number of potential witnesses who must be interviewed.
The primary attorney for the investment banks, Gandolfo V. DiBlasi, did not return a call for comment. Wall Street firms involved in the cases include Morgan Stanley, Credit Suisse First Boston LLC, Goldman Sachs Group Inc., Lehman Brothers Inc., Bear Stearns Cos., J.P. Morgan Chase & Co., and Citigroup Inc.
The issuing companies named in the suits agreed to a settlement last year that guarantees investors at least $1 billion. But under terms of the agreement, the companies will not have to pay if investors eventually recover more than $1 billion from the investment banks.
Meanwhile, in Washington on Wednesday, the SEC approved by a 5 to 0 vote a series of rules intended to tighten the IPO process. Among other things, the rules would curtail Wall Street's ability to promote new stocks and would forbid extracting promises from IPO share recipients to buy more shares on the open market.
The rules go out for public comment and may be altered before a final vote.
Jay R. Ritter, finance professor at the University of Florida, said the new rules are "better late than never." But he said in an interview that in some ways the rules would simply strengthen existing regulations. "I would say the SEC has had statutes on the books for approximately forever that, if enforced, could have addressed a lot of the worst excesses that went on five years ago."