|Tuesday, January 22, 2002
Nancy A. Condon
NASD Regulation Charges Credit Suisse First Boston with Siphoning Tens of Millions of Dollars of Customers' Profits in Exchange for "Hot" IPO Shares
Washington, D.C.—NASD Regulation, Inc., announced today that it censured Credit Suisse First Boston Corporation (CSFB) and directed it to pay $50 million in monetary sanctions for taking millions of dollars from customers in inflated commissions in exchange for allocations of "hot" Initial Public Offerings (IPOs). The inflated commissions essentially amounted to a "profit sharing" arrangement with CSFB as the IPO shares climbed in the secondary market. As part of the settlement, CSFB will also pay $50 million to the Securities and Exchange Commission.
Following a 10-month investigation, which began in May 2000, NASD Regulation determined that CSFB's IPO profit sharing practice was widespread, occurring between April 1999 and June 2000. The practice affected more than 300 accounts serviced by the firm's Institutional Sales Trading Desk, its Private Client Services (PCS) Group and its PCS Technology Group. Certain senior managers and other employees of the Equity Sales and Equity Capital Markets Departments directed the practice, instructing CSFB employees to give greater allocations to those accounts who agreed to share their profits with CSFB. During one quarter alone, these inflated commissions on profit-sharing trades accounted for over 22 percent of CSFB's commission revenue.
Robert R. Glauber, Chairman and CEO of the NASD said of today's action, "The capital formation process will be well served and the investing public treated more fairly as a result of the disciplinary action announced today. Our prompt and forceful action to deal with these serious violations of ethics and NASD rules brings a rapid close to this chapter. Along with the SEC, we will continue to look at what additional measures, if any, may be necessary to ensure that the IPO allocation and distribution process is fair."
"This conduct was a blatant disregard of NASD rules and a serious breach of a firm's responsibility not to exploit its position as an underwriter," said Mary L. Schapiro, President of NASD Regulation, Inc. "CSFB's behavior undermines the integrity of the capital-raising process which is essential to the health of our economy, and shakes the faith of investors in the fairness of the markets."
Schapiro went on to say, "Given the enormous significance and complexity of this case, I am particularly pleased that we were able to work together with the SEC to reach a strong and consistent regulatory response to the conduct at issue."
As noted in the settlement, CSFB generally charged its clients 6 cents per share for executing an agency trade in a listed security of 10,000 shares or more. However, during the relevant period, CSFB allocated hot IPO shares to certain customers who, in exchange, paid the firm a portion of their IPO profits disguised as inflated brokerage commissions on transactions unrelated to the IPO.
Thousands of transactions were executed with excessive commissions, including hundreds of trades with commission charges of $1 per share or more, some as high as $3.15 per share. These commissions bore no relationship to the execution of the trade and were paid solely to provide the firm with a share of client profits on hot IPOs. Over 90 percent of the excessive commission transactions executed on the day of, the day before, or the day after a CSFB-managed IPO were done by accounts that were allocated shares by CSFB in that hot IPO.
NASD Regulation found that CSFB established and maintained specific ratios to which the firm expected certain customers to adhere. For example, accounts on a 3:1 ratio were expected to pay one-third of their profits on IPOs to CSFB in the form of commissions on secondary trades. Customers that shared their profits with CSFB would be allocated shares in upcoming IPOs. Those that refused would not receive additional IPO share allocations or would receive smaller allocations. The ratios changed over time, and were different for different customers. In PCS-Tech, located in the firm's California office, CSFB initially required hedge fund accounts to pay the firm 50 percent of profits, later increased to 65 percent. In virtually all events, CSFB expected that these customers would, at a minimum, return one-quarter of IPO profits in commissions on secondary trading.
CSFB created and maintained several reports that were used to record and track the sharing of client profits with the firm. These included the New Issue Performance Report, that detailed the amount the client would have made on each IPO allocation if sold on certain dates. PCS-Tech maintained spreadsheets that detailed specific profits made by each account and the percentage of such profits paid to the CSFB. PCS-Tech also maintained a report entitled the Institutional Account Profit Comparison that compared accounts' monthly profits to secondary commissions paid and calculated a year to date percentage.
CSFB managers, brokers and sales traders participated in each dollar of profit paid to the firm, some directly and some indirectly. One senior manager allocated shares to his own clients who paid over $2.7 million in inflated commission charges. PCS salesmen were paid one-third of the commissions generated by each of their accounts. One PCS broker, for example, earned over $1 million from these excessive commission payments alone. PCS-Tech traders and salesmen were compensated through participation in a bonus pool funded, in part, by commissions generated by these accounts. Others in the firm, including senior managers, institutional sales traders, research sales persons and Syndicate Desk personnel were paid largely through bonuses based, in part, on commission revenue generated by these firm accounts.
NASD Regulation found that CSFB's practice violated NASD rules prohibiting member firms from sharing in the profits of client accounts. It also violated NASD rules that require member firms to disclose information which may be material to, or part of, underwriting arrangements and which may have a bearing on NASD's review of underwriting terms and arrangements. Here, CSFB failed to file information with the NASD that detailed the excessive commissions and profit sharing arrangements the firm made for the allocation of IPO shares. CSFB's profit-sharing scheme further violated NASD Rules which require brokerage firms to adhere to just and equitable principles of trade, as well as supervisory and books and records requirements.
The NASD has earmarked funds from the settlement to be used for initiatives focusing on investor protection and education. These initiatives will include technology investments for enhanced surveillance and enforcement, education materials and outreach programs for investors.
As part of the settlement, CSFB agreed to engage an Independent Consultant to conduct a review of the implementation of revised procedures regarding the areas of its business that were the subject of the action. In settling this matter, CSFB neither admitted nor denied NASD Regulation's allegations.
This case was investigated by NASD Regulation's Enforcement Department, with assistance from NASD Regulation's Corporate Finance Department. NASD Regulation also acknowledges the substantial assistance and cooperation of the SEC's Northeast Regional Office in this matter.
Investors can obtain more information about NASD Regulation as well as the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999, or by sending an e-mail through NASD Regulation's Web Site, www.nasdr.com.
The National Association of Securities Dealers, Inc. is the largest securities industry, self-regulatory organization in the United States. It is the parent organization of NASD Regulation, Inc.; the American Stock Exchange, LLC; and NASD Dispute Resolution, Inc. For more information about the NASD and its subsidiaries, please visit the following Web sites: www.nasd.com; www.nasdr.com; www.amex.com; www.nasdadr.com.