Wall Street's top investment banks are wading through a series of lawsuits from investors who want to get back some of the wealth they lost when the high-tech and Internet stock bubble burst last year.
Wall Street firms have been hit in recent weeks with a spate of claims seeking class-action status. The claims come on the heels of regulators' investigations into how underwriters have awarded shares to investors in high-tech and Internet initial public offerings.
Individual investors have also been taking on their brokers, brokerage houses and financial advisers in recent months for loading up portfolios with stocks of technology and Internet companies. The result has been a record number of investor complaints (InvestmentNews, April 9).
The class actions are the newest wrinkle. "These suits are a little different," says Fred Isquith, a partner with Wolf Haldenstein Adler Freeman & Herz LLP in New York. Several suits "are challenging a practice in the brokerage community about the way IPO stock is being placed," he says.
At issue is "whether the way of doing business in effect manipulated the price of these issues," he says.
Class actions often begin with serious allegations, seek millions of dollars and then are dismissed, observers say.
The lawyers alleging the wrongdoing will have a hard time proving their claims, some argue. The market for IPOs is highly regulated and features the transparent reporting of trades and commissions, says Dennis Hensley, a lawyer with Brown & Wood LLP in New York.
Obviously, lawyers for the plaintiffs see things differently.
The Securities and Exchange Commission has been looking into questionable IPO practices, they note.
Securities regulators have sent detailed lists of questions to some investment banks, seeking information about the stock trades of specific IPOs over the past couple of years, says one observer.
some big names
The suits involve the largest underwriters of technology and Internet stock offering, including Credit Suisse First Boston and Morgan Stanley Dean Witter & Co.
They also involve some of the hottest IPOs of the past couple of years. David Rosenstein, a spokes-man with Milberg Weiss Bershad Hynes & Lerach LLP of New York, says the model for other claims is the case against VA Linux Systems Inc., the computer systems and services company.
It launched Dec. 9, 1999, at $30 a share. The stock shot to $320 a share that day before closing at $233 a share, up 676%, according to the lawsuit. It was trading at $2.85 in the middle of last week.
Credit Suisse First Boston was the lead underwriter on that deal. Milberg Weiss was chosen this month as the lead counsel in 18 separate lawsuits against VA Linux.
Shareholders describe similar experiences in pending lawsuits against other technology and dot-com stocks, including Ariba Inc. and Marketwatch.com Inc.
"The class-action suits have no merit, and we will defend ourselves vigorously," says Jeanmarie McFadden, a spokeswoman for Credit Suisse First Boston in New York.
In another matter, Credit Suisse First Boston earlier this month put two senior employees who were involved with technology IPOs on leave (InvestmentNews, April 23).
complex scheme
The complaints allege the investment banks acted in collusion. The brokers and customers usually agreed to bid up the price of a stock, says Mr. Isquith.
The claims are far reaching. First, the underwriters sold shares to customers at the IPO price. In exchange, customers promised to purchase shares in the aftermarket at progressively higher prices. The process, called "laddering" by some, ratchets up the stock's price.
The underwriters and the customers cashed in when they sold the shares at the inflated prices. The investment banks required their customers to pay kickbacks in the form of secret commissions, the class actions claim.
"It has the result of inflating the stock. It does so in a way that has the appearance of an artificial demand," says Mr. Isquith. "That's a lie."
But some argue that the notion of collusion among underwriters, clients and rival firms is misguided. "Firms have compliance and surveillance in-house," says Mr. Hensley.
