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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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