Staff reporters for The Wall Street Journal, they broke the story of the IPO investigations in December 2000. FRONTLINE interviewed them in August 2001 and again in January 2002.

What is being investigated by the SEC?

Randall Smith: The two main areas are oversized commissions in exchange for IPO allocations, and aftermarket orders, which are either firm orders or loose agreements to bid more, pay more, after a stock comes public as part and parcel of the process of the IPO.

And what's wrong with [the aftermarket orders]?

Randall Smith: It could be construed as something that could push the price up after it starts trading in some kind of prearranged way that would violate securities laws.

But in this hot IPO market, all those IPOs were put out there at very low prices, and they were "popping" like crazy [i.e., shooting way up in price on the first day of trading]. Why would price manipulation even be an issue?

Randall Smith: There's a school of thought that some of these aftermarket orders did contribute to the size of the pop. And as the system became more evolved, it was almost like a choreographed pop, where it became common for both hedge funds and other investors, as part of cementing an order for an IPO, to also make some kind of commitment that they would buy more stock after it started trading at a much higher price.

So you think that actually contributed to manipulating the process in the IPO and driving the price up?

Randall Smith: Manipulating is a legal term, and I wouldn't want to draw a conclusion about that, because that's what the regulators are looking at. But it would certainly tend to move the stock in that direction, sure. ...

Susan Pulliam: One of the things that's really interesting about this case is that it involves practices that have been around for years. I mean, this is sort of standard operating procedure in the IPO process. You've allocated shares to your best clients. And, often, as an indication that they were a good client, they'd buy in the aftermarket. But the thing that I think regulators are looking at is whether or not industry practices crossed over a line and these agreements became something that violated securities laws during the big IPO boom.

Define that line. ...

Susan Pulliam: The IPO process, who gets IPO shares, has always been an unfair process. IPO shares have always gone to Wall Street's best customers. But the question is whether or not Wall Street began demanding something in return because there were so many good customers lined up to get these shares. ...

The line as the regulators seem to see it is whether or not there was a quid pro quo. If you're demanding payments in exchange for an IPO allocation, that crosses over a line that may violate securities laws.

Chairman of the Securities and Exchange Commission from 1993 to 2001.

If an investor, a large mutual fund, is receiving an allocation in an IPO on the understanding that they will make certain purchases or pay higher commissions in the aftermarket, is that a serious violation?

Hypothetically, if that investor, that recipient of an IPO, was required to pay extraordinary commissions on non-related transactions or required to make specific aftermarket purchases, I believe that, hypothetically, you could consider that a manipulative action.

That manipulates the price of a stock.

It could. ...

We've been told that some people in the investment banking community have come forward to the SEC and laid out their practices -- the laddering, excessive commissions. ... Will these allocation tie-ins, laddering, etc. -- is this something that is provable?

I can't comment on a specific investigation. But I can say to you that -- again, on a hypothetical basis -- this kind of allegation would be very difficult to prove; not impossible, but difficult. And that's so because you would have to have hard evidence of conversations, of transactions, of other elements of fraud. I think that's possible. But I don't think it's something that you can readily assume that the investigation will necessarily and certainly lead to a resolution.

Executive editor of Fortune magazine and the author of A Piece of the Action: How the Middle Class Joined the Money Class (1994).

Can you explain the allocation system as it has traditionally existed?

The allocation system has been problematic. ... The historic way to do it is to give the largest allocations to your biggest customers. So Fidelity is going to get a large allocation. Janus is going to get a large allocation. All the big growth tech funds from very, very large hedge funds will get large allocations. That is the system as it existed. And Fidelity, even at three cents a share, is going to be paying gigantic commissions to everybody on the street, because they have a trillion dollars in America's assets, and they trade a ton of stock every day.

What is an allocation?

An allocation is basically a portion of an IPO that goes to your firm. You are given the right to buy x number of shares at the minute -- and I do mean the minute -- this company goes public. Afterwards, you can do anything you want. You can sell it on the first day, or you can put it in your pocket and hold it for the next five years. ...

Is this the best way to allocate shares? ... Should it really be the investment banks' best customers? Or should there be some system devised to find people who will be long-term shareholders and have the best interests of the company at heart? Should IPO allocations be about giving big customers a one-day profit? You know? That's a worthy question. ...

Can you answer it?

I can't. How do you find who are the best shareholders? It's not corrupt to give it to your best customers, to your biggest customers. ...

The reason there's a "scandal," quote unquote, is because smaller firms ... have been able to, in effect, jump to the front of the line and get much larger allocations than they would be normally allotted, by paying gigantic commissions, a dollar a share instead of three cents a share. That's why there's a so-called scandal. Is that system any worse than just meting it out according to who's the biggest customers? In other words, the so-called scandalous way of allocating is a lousy way to allocate. But the normal way of allocating isn't so great either. ...

This seems to be the grandest irony of all. The Internet comes along and it promises democratization. It's all about you and me get equal access to the same information at the same time. That was the promise. And now we're investigating a scandal in which the bankers playing by the old rules decided who was included, who was excluded, who got information, who didn't get information.

Democratization has been going on in this country, financially, since the 1970s. And people do have a lot more information than they used to, and they can make better decisions, and they can trade stock more easily; all of that is true.

But if the events of Internet mania proved anything, they proved that Wall Street is still a club; that insiders still have enormous advantage over the rest of us; and all the technology and all the democratization has simply not been able to trump that one fact.

A veteran investment banker, he is the founder, chairman, and CEO of W.R. Hambrecht & Co., an online investment bank that has developed an innovative "Dutch auction" IPO.

What is wrong with the way in which investment banks were doing business during the bubble?

The IPO market, when it really heated up three or four years ago, created an unsustainable volatile situation in the marketplace, where it became too easy to raise money, and it became too easy to underwrite almost anything and raise the money. On top of that, because it was such a hot market that gave such high valuations to untested companies, it was very easy for underwriters to -- "take advantage" is maybe the wrong word -- but I think underwriters' economic agendas started to determine who would get the stock.

Instead of a situation where you're hired as an underwriter to place the stock with people who are going to be the long-term shareholders, when you get into volatile hot markets where you get this unusual first-day trading profits, there's a tremendous propensity to give that stock to your best client. And they in turn sell it and take a quick profit, and then the long-term buyer, the guy you wanted in the first place, ends up buying it in the volatile after-market.

And it happens only when you get into these really hot markets. But it also creates an atmosphere where an underwriter's sales force is, in effect, giving away guaranteed profit. And if you're giving away guaranteed profit, you probably at some point in the food chain are going to have some deal made that returns something to the underwriter.

What would that be?

It's classically been commissions. In other words, the best clients of investment firms are firms who trade the most and in effect pay big commissions in trades. So they would be naturally listed as the best clients of the firm.

But what's wrong with best customers getting the biggest allocations?

Nothing, if it's in the normal course of business. I think the SEC is on record as saying that an underwriter has a perfect right to place the stock with his good customers. I think what happens sometimes, though, is that it moves beyond that ... to where there is a sort of rate of return given back to someone who creates a certain amount of profit.

There's a very thin line that divides ethical behavior and to move over into behavior that's not in the best interests of the company or the final buyer or even the underwriter. ...

Let's talk hypothetically, if the banks are using the IPOs as a form of bribery, to bribe people to give them kickbacks, is this just a form of cynicism? Or how do we understand that?

First of all, if that's what they truly did, if that's all it was, if it was just a straight kickback, I think it's very clear that that was illegal. You know there is that prospectus requirement that an underwriter disclose all the compensation he gets for an offering, both direct and indirect. So if nothing else, you've violated a prospectus requirement.

But beyond that, I'd say it's unethical, and it's bad business practice, and I don't think you'll find anybody at the SEC or the NASD that wouldn't say that, if that's what happened, that that isn't illegal. The problem is there's this thin line between that and taking care of your best customers. And I think that's going to be up to the courts and the SEC and everyone else to decide who stepped over that line or not.

And I don't know. That's going to come out in the wash.

Senior partner at the Manhattan law firm of Milberg Weiss Bershad Hynes & Lerach, he has filed 110 lawsuits against scores of companies and seven leading investment banks.

So who was doing this?

Well, the allegations in our complaint name many of the biggest investment banks; which is different from historical allegations of this type where fringe players were the ones who were engaged, or at least they were the ones that were being fingered.

Now there are investigations that are ongoing with respect to CS First Boston, Morgan Stanley, Merrill Lynch -- I mean, these are the biggest players. And that's what makes this so shocking -- that it could infect even institutions of that size -- Goldman Sachs. These are revered institutions in Wall Street. But the profit from these activities became so enormous that the temptation to do it was just overwhelming. ...

So what is different [this time] and how upset should people be about this?

I think they should be very upset, because the investment banker is supposed to be a watchdog in the role of the underwriter. It's supposed to do due diligence. It's supposed to protect its customer. It has a know-your-customer rule. It has been invested with the ability to make money if it does the right thing by the investor. It is supposed to be looking for quality; or if it's not quality, to tell all of the truth about the product, so people can make an informed investment decision. ...

But here we're dealing with a market manipulation by, not the issuer, but the underwriter, by the investment banking community. And that's the scary thing -- that the investment banking community that has a fiduciary responsibility and a statutory responsibility to protect the customer is actually creating the artificiality in the market.