finra

FINRA

Tuesday, January 22, 2002

Statement of Mary Schapiro on Announcement of CSFB Action

Thank you, Steve. First let me recognize and thank Wayne Carlin and his staff at the SEC's Northeast Regional Office for their excellent work in this investigation. Given all the dislocation that office faced after September 11, they deserve special credit here today. I also want to salute the staff of the NASD for working so hard and so well to bring this matter to a prompt and just conclusion.

 

The successful resolution of this case and the $100 million sanctions we impose today are the product of an enforcement partnership between the SEC and NASD that has never been stronger. The investing public and the process of capital formation in our country both benefit enormously when we can expose and stamp out securities allocation practices that undermine the integrity of the markets.

 

We all remember the hot IPO markets of one or two years ago, when the share price of many new issues increased to multiples of the offering price on the first day of aftermarket trading. During this period, Credit Suisse First Boston was a major participant in IPO underwriting. In fact, CSFB in 1999 managed more domestic new issues than any other US investment-banking firm.

 

Well aware of the substantial profits being earned by its institutional customers on IPOs, CSFB carried out a very conscious plan to grab a share of these profits for itself. They did this by trading allocations of hot issues for a share of their customers' profits in the new stocks they had been allocated.

 

The vehicle CSFB used to accomplish this was the payment by hundreds of customers of greatly inflated and excessive "commissions" in unrelated trades. Although called "commissions," these disguised payments were in fact nothing of the sort. They were, as described in e-mails quoted in the settlement, "deal paybacks" or "payments for deal stock." These so-called brokerage commissions went as high as three dollars and fifteen cents per share, and often were more than ten times ordinary commission rates.

 

In all, CSFB wrongfully squeezed tens of millions of dollars out of hundreds of customer accounts in exchange for IPO shares in high demand. And the huge sums involved were of unmistakable significance to the firm. In one fiscal quarter alone, these wrongful gains accounted for more than 22 percent of CSFB's total commission revenue.

 

Credit Suisse First Boston carried out this practice by establishing required payback ratios for its clients. For example, a customer on the so-called "3 to 1 plan" was expected to pay back one-third of its IPO profits in the form of excessive "commissions" on unrelated trades. One department of the firm went so far as to require that certain customers pay back sixty-five percent of their profits to CSFB in the form of inflated commissions. When one CSFB trader asked another in an e-mail whether "this 65 percent thing is illegal," he was told, "I don't know. It probably would not look so good to anyone making an inquiry, though."

 

In fact, this conduct is intolerable. It flouts key NASD rules that prohibit broker-dealers from sharing in the profits of client accounts. It runs afoul of our rules requiring member firms to provide us with information material to our review of underwriting arrangements. It violates our fundamental rule requiring firms to respect just and equitable principles of trade. And worst of all, it undermines the market integrity and investor confidence that all our rules were written to serve.

 

The record fine and disgorgement that will be paid to conclude this matter, as well as the undertaking to revise their IPO procedures and engage an independent consultant reflects the magnitude and seriousness of CSFB's misconduct -- and the importance that we, as self-regulators, place on compliance with our rules and the federal securities laws. And, I certainly hope and expect it will serve as a mighty deterrent to any firm that would consider pursuing wrongful practices such as these in the future.

 

Thank you. And now we would be pleased to take your questions.