NASD Charges Invemed Associates with Sharing in Customers' Profits from Hot IPOs
Washington, DC — NASD announced today that it charged Invemed Associates LLC of New York, NY with unlawful profit-sharing activities that took place in late 1999 and early 2000 in connection with "hot" IPOs it sold to its customers.
According to the complaint, Invemed received millions of dollars in inflated commissions from dozens of customers who sought and received allocations of "hot" initial public offerings (IPOs) from the firm. Customers paid the inflated commissions on agency transactions in highly liquid securities, with commissions as high as $2 per share on large transactions where the typical or ordinary charge would have been approximately 6 cents per share. Additionally, customers paid the firm inflated commissions as high as $8 per share as they "flipped" their allocated IPO shares, immediately selling in the aftermarket at substantial profits.
These inflated commissions accounted for approximately one-third of the firm's total agency commission revenue during the last quarter of 1999 and the first quarter of 2000. Invemed's sales representatives received approximately 50 percent of commissions generated on trades done in the accounts of their customers. The sales representatives' compensation was entirely based on customer commissions.
From October 1999 through March 2000, Invemed participated as a member of the syndicate or selling group in more than 50 IPOs. Most of these IPOs opened for trading at significant increases from their offering price, with 20 of them more than doubling in value from the IPO price. That dramatic increase provided substantial profits to customers who sold in the immediate aftermarket. Invemed shared in profits of its customer accounts by receiving inflated commissions from IPO customers on unrelated agency trades which generally were paid close in time to the receipt of the IPO. For example, on December 9, 1999, one customer received 2,000 shares of VA Linux, as well as 2,000 shares of FogDog. If the customer had immediately sold the IPO shares after receiving them, the customer would have profited by more than $550,000. That day, the customer paid the firm $140,000 in agency commissions, including 20 cents per share commissions on 700,000 shares of two highly liquid securities.
NASD charges that the profit sharing was evidenced by the pattern of trading in the customer accounts and profit-tracking spreadsheets used by some Invemed brokers. These spreadsheets tracked customers' hypothetical IPO profits and compared the profits with the brokerage commissions the customers had paid.
Evidence of profit sharing was also shown through wash trades done by at least two customers. In these situations, the customers purchased shares of a highly liquid security through Invemed and within minutes or hours sold the same number of shares in that security through Invemed, frequently paying inflated commissions on both sides of the trade. For example, on March 10, 2000, a customer received allocations in two hot IPOs. That same day, the customer bought and sold 10,000 shares of a highly liquid security, paying a commission of 20 cents per share. The customer incurred a loss of approximately $15,500 on the wash trade, including $4,000 in commissions. These trades were of no economic benefit to the customer and resulted in immediate losses to the customer, while generating commissions in the form of shared profits for the firm. One customer engaged in more than 12 such wash trades in just over one month's time.
Invemed supervisors and senior managers knew or should have known that their customers were engaged in profit sharing or, at a minimum, were attempting to influence IPO allocation decisions, the complaint charges. For example, the CEO was advised each day of the firm's gross commissions. On the day of the FogDog and VA Linux IPOs, the firm generated approximately $600,000 in commissions, more than double what the firm had earned in the previous three days combined.
This is the sixth disciplinary action taken by NASD concerning the allocation of IPOs.
Under NASD rules, a firm named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible remedies include a fine, censure, suspension, or expulsion from the securities industry, disgorgement of gains associated with the violations, and payment of restitution.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD's web site at www.nasd.com.
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