SEC Issues Warning to Securities Firms

In the first sign of a regulatory crackdown, the Securities and Exchange Commission (SEC) issued a legal bulletin reminding securities firms that the solicitation of "tie-in" agreements -- arrangements requiring clients to buy additional stock shares in the aftermarket as a precondition of being allocated IPO shares (also known as "laddering") -- were prohibited by securities laws.

According to a Dec. 7 report by Susan Pulliam and Randall Smith, in mid-2000 the SEC and the U.S. attorney's office in Manhattan began a joint investigation of whether firms were violating securities laws by exacting unusually large trading commissions from clients as kickbacks in return for allocations of hot IPO stocks. While the typical institutional commission rate for trades was five or six cents per share, investigators found commissions as high as $2.75 per share. The report named Credit Suisse First Boston (CSFB) as an early focus of the investigation, and a later report indicated Goldman Sachs, Morgan Stanley Dean Witter, and Bear Stearns had all received subpoenas for documents related to their IPO practices and commission rates.

On Dec. 6, The Wall Street Journal published a front-page article on how informal tie-in agreements were fueling the dotcom investment mania. Following the publication of this article, the SEC expanded its investigation to include these allegations.

CSFB Fires Three Brokers in Connection With IPO Probe

After an internal investigation, CSFB fired three brokers for violating the firm's IPO practices -- reportedly for pressuring clients to pay higher commissions on stock transactions in exchange for IPO allocations. The firings focused attention on CSFB star technology banker Frank Quattrone because all three of the brokers worked in CSFB's San Francisco office, where Quattrone's division is headquartered.

CSFB Chief Executive Ousted

Credit Suisse Group, CSFB's parent company, ousted CSFB chief executive Allen Wheat, reportedly partly due to the risk-taking culture he encouraged at the firm, and the resulting clashes with U.S., European, and Asian regulators, including the IPO investigation. He was replaced by former Morgan Stanley executive John Mack, who in a move seen as laying the groundwork for a settlement, hired former SEC enforcement chief Gary Lynch as the firm's general counsel.

President Bush Appoints New SEC Chairman

Two days after Senate confirmation of his nomination as commissioner, Harvey Pitt was sworn in to a six-year term as SEC chairman on Aug. 3. The previous chairman, Arthur Levitt, had retired in February 2001. At his confirmation hearings, Pitt promised to "ensure vigilant enforcement" of SEC rules, and pledged to lead a review of outdated securities laws.

WTC Attacks Destroy SEC Office

In the aftermath of the Sept. 11 attacks, the SEC's enforcement office was destroyed by the collapse of 7 World Trade Center. The agency's investigators were forced to scramble to reconstruct many lost documents related to the IPO probe.

CSFB Agrees to $100 Million Settlement

Following an 18-month investigation into CSFB's IPO practices, the SEC announced that the investment firm had agreed to a settlement with the SEC and the NASD in which CSFB will pay a $100 million fine to resolve the investigation -- the fifth-largest regulatory settlement by a securities firm. By agreeing to the settlement, CSFB will avoid being charged with securities fraud, although regulators are still investigating past and current CSFB employees.

In its complaint, the SEC charged that between April 1999 and June 2000, CSFB had allocated IPO shares to over 100 customers -- mostly hedge funds -- who, in return, were forced to funnel between 33 percent and 65 percent of their profits back to CSFB by paying excessive brokerage commissions on other transactions. According to the SEC, the customers were informed "both implicitly and explicitly, that they were expected to pay back to CSFB a portion of profits earned on their IPO flipping in order to continue to receive allocations."

The SEC charged that "the profit-sharing activity was pervasive at CSFB" and in particular singled out the actions of CSFB management: "Senior executives who were in managerial and supervisory roles knew of the practices described in the complaint, encouraged many of the practices described in the complaint, directed CSFB employees to urge customers to maintain specified ratios of commissions to IPO profits, and in some instances, personally engaged in some of the practices described in the complaint."

As part of the settlement agreement, CSFB neither admitted nor denied guilt in the matter, and will avoid civil securities-fraud charges. It agreed to pay a $30 million civil penalty to be divided between the SEC and NASD, and a $70 million payment representing the illegal proceeds to be divided between NASD and the U.S. Treasury. The company also has agreed to change its methods of allocating IPO stock, including establishing an IPO Allocation Review Committee and hiring an independent consultant to review new policies and procedures after one year. As part of the judgment, CSFB must implement the recommendations of the independent consultant. CSFB also announced that it is taking disciplinary action against the employees involved in the matter.

The SEC is continuing its probe into whether securities firms -- including Goldman Sachs, Morgan Stanley, J.P. Morgan Chase & Co., and the Robertson Stephens unit of FleetBoston Financial Corp. -- manipulated IPOs by distributing shares to investors who made promises of aftermarket purchases. Upon completion of its investigation, the SEC is expected to either issue clarifications to existing rules or announce new rules on how IPO stocks should be allocated, in an attempt to level the playing field for individual investors.