Wall Street Tab In IPO Lawsuits Could Reach $100 Million
Wall Street Journal - 07.05.01
By Randy Smith, and Susan Pullman

Wall Street is facing a legal bill that could reach $100 million-not counting any possible judgments or penalties-for defending itself against the mushrooming class-action lawsuits arising from the IPO allocation investigations.

So far, more than 200 separate lawsuits have been filed against companies that sold stock In initial public offerings during the IPO boom of 1998 to 2000, along with their Wall Street underwriters. This is according to a count on June 25 by Dennis P. Orr of the law firm of Mayer, Brown & Platt, which is representing four companies that issued IPO stock.

The allegations in the lawsuits, most of them filed by investors in companies that went public, generally track investigations being conducted by the U.S. Attorney's office in Manhattan, the Securities and Exchange Commission and the regulatory unit of the National Association of Securities Dealers, known as NASDR. A grand jury also is hearing evidence, presented by the U.S. attorney, of possible criminal conduct.

The U.S. Attorney, SEC and the NASDR are probing whether securities firms charged investors inflated commissions in exchange for 1PO shares that constituted bribes or kickbacks. The SEC also is examining whether the securities firms drove the IPO prices higher office trading began by requiring some customers who got IPO shares to place so-called after-market orders for additional stock at higher prices. The firms generally deny wrongdoing, saying their IPO allocations were within the boundaries of accepted practice on Wall Street.

The class-action cases generally accuse the issuers and the securities firms of violating federal securities laws; a much smaller number of suits allege violations of federal antitrust laws arising from the same circumstances. While the antitrust cases are all being heard by a single federal judge, William H. Pauley 111, the securities cases related to about two dozen IPOs are proceeding before more than 20 judges.

"These are not nuisance lawsuits, these are serious cases that will be expensive for the brokerage industry and ultimately probably will be settled for some significant amount of money because they may be too dangerous to try," said Roger Crane, head of the New York office of the law firm McCarter & English. He estimated the cases could drag on for three to five years, depending on whether the firms can reach a settlement or take the cases to trial, and could cost $30 million or more In legal fees alone. Another lawyer involved in the case, who asked to remain unidentified, estimated the tab could hit $100 million within two years.

John Coffee, a professor at Columbia Law School, says he doesn't believe the class-action suits will advance unless regulators bring charges against Wall Street firms or their employees. "Once there is an indictment, then the plaintiffs' bar rides in on [regulators'] coattails:' Mr. Coffee said he doubts whether private plaintiffs could prove manipulation without action by a grand jury.

In the instance of one IPO, a $56 million issue in October 1999 by Calico Commerce Inc., San Jose, Calif., so many separate cases were filed that three different judges in the same court got assignments related to it, according to a June I letter from Andrew J. Frackman, a lawyer at O'Melveney & Myers LLP, which represents the Robertson Stephens Inc. unit of FleetBoston Financial Corp.

Writing on behalf of lawyers for six other securities firms-the Credit Suisse First Boston unit of Credit Suisse Group, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co., Morgan Stanley, and the Salomon Smith Barney unit of Citigroup, Inc.- Mr. Frackman urged Michael B. Mukasey, the chief federal court judge in Manhattan, that all the securities-law actions related to the same issuer be consolidated. The Calico cases have since been consolidated.

While Mr. Frackman said the major firms don't believe that all the securities law actions against different issuers need be consolidated In a single proceeding, he did suggest that separate actions Involving multiple underwriters be consolidated for pretrial purposes before a single judge because the allegations will present similar issues. Judge Mukasey hasn't followed that suggestion.

Lawyers for some of the plaintiffs have urged the courts to go even further by consolidating both the antitrust and securities cases together. But Judge Pauley has Indicated he doesn't intend to combine the two kinds of cases, and last month set a schedule of court hearings for the antitrust cases on such issues as selection of lead counsel, whether the case should be dismissed, and whether to allow discovery.

Discovery could allow lawyers for investors and other aggrieved parties the chance to see records of IPO allocations and related trading, potentially opening a Pandora's box of backstage secrets about how Wall Street handles IPOs. But discovery Is more limited under 1996 litigation-reform rides governing the securities part of the case.

In a June 19 letter to Judge Pauley, two plaintiffs' lawyers accused the lawyers for the securities firms of seeking a schedule that could delay discovery in the antitrust cases until after the securities cases have been organized. If that happened, "discovery in the antitrust cases and other pretrial proceedings might not begin for several years," warned the lawyers, Fred Taylor Isquith and Richard Schiffrin.

Two days later, a lawyer for Goldman Sachs, Gandolfo V. DiBlasi of the law firm Sullivan & Cromwell, disputed that. "Mr. Isquith's assertion that the defendants are seeking an indefinite stay of discovery in these cases is incorrect," he wrote, adding the underwriters merely want to delay discovery until after a ruling on defendants' motion to dismiss.

The securities firm with one of the biggest legal bills at the moment appears to be Credit Suisse First Boston, which has been notified by the NASDR that the firm and at least six of its employees may be charged with rule violations related to receipt by the firm of big commissions in connection with IPO allocations. The firm also has terminated three brokers in its San Francisco office, based on purported evidence that they violated the firm's policies on IPO allocations; the three brokers, who didn't receive NASDR notification, deny wrongdoing.

CSFB has three law firms on the case. Robert B. Fiske Jr., the former U.S. Attorney In Manhattan who also served briefly as independent counsel in the Whitewater investigation, is leading the defense against possible criminal charges at Davis Polk & Wardwell. William R. McLucas, a former SEC enforcement chief now at Wilmer Cutler & Pickering, is handling the civil case. And Richard A. Cirillo of King & Spalding is leading CSFBs class-action defense.

One of the biggest battles in the class-action cases is being waged among law firms vying to become the lead plaintiffs' counsel. Although Milberg Weiss Bershad Hynes & Lerach LLP, with 190 lawyers, holds a dominant share of securities class-action cases in general, it is being challenged by the team of Lovell & Stewart LLP and Sirota & Strota.

Lovell & Stewart partner Christopher Lovell served as co-lead counsel with Milberg Weiss for plaintiffs in a $1 billion settlement with Wall Street firms in 1997, after the Justice Department charged two dozen of them in 1996 with violating antitrust laws by conspiring to fix bid-asked spreads on some Nasdaq Stock Market stocks. Milberg Weiss has taken an early lead in lead-counsel designations in the securities cases, which are generally based on whose plaintiff has the biggest economic stake, winning that assignment in the cases involving VA Linux Systems Inc., and Merrill Lynch B2B Holders.

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