Wall Street Banks To Face Law Suits Over IPOs

by Glen Shapiro, LawAndTax-News.com, New York

21 February 2003

US financial giants have already been hit by massive write-offs to cover fines and out-of-court settlements resulting from misleading stock research which led investors astray; but worse may be to come after a federal judge denied requests to dismiss investor lawsuits that allege securities firms manipulated the market for initial public offerings of stock during the late 1990s.

More than 50 banks including Goldman Sachs and Citigroup tried to have a New York court throw out the claims, but District Judge Shira A Scheindlin said in a 238-page ruling that the plaintiffs presented "a coherent scheme by underwriters, issuers and their officers to defraud the investing public," and that, if the claims are true, "this scheme offends the very purpose of the securities laws".

The action comprises more than 1,000 suits in total, in which hundreds of investors are acting against 55 securities firms, including Goldman Sachs, Citigroup and Morgan Stanley, and more than 300 companies that issued IPOs during the late 1990s. Specifically, the suits allege that underwriters allocated IPO shares to investors who said they would later buy shares in the market, a practice known as 'laddering', and then charged high brokerage commissions on the trades, by agreement.

If the banks lose in a trial the damages would run into billions of dollars, so that a settlement ahead of trial seems all but certain. The banks and brokerages have already agreed with the SEC to pay more than $1.4 billion to settle allegations that share research was calculatedly positive, hitting results already weakened by flagging securities markets and assorted scandals. Citigroup has provided $1.55 billion to cover the share research allegations and litigation arising from its involvement in the Enron debacle and other financial scandals; CSFB lost $1.2 billion last year, providing $450m to cover lawsuits.

The banks hope that they can claim the costs of litigation from their insurers, but they will have to fight for the money, as insurers including Lloyd's of London say the policies do not cover fines for wrongdoing.

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