NASD Charges Robertson Stephens with Sharing in Millions of Dollars of Customers' Profits in Exchange for "Hot" IPO Shares
Washington, DC — NASD announced today that Robertson Stephens, Inc., has been censured and ordered to pay $28 million for receiving inflated commissions from more than 100 client accounts in exchange for the allocation of "hot" initial public offerings (IPOs) in 1999 and 2000 during the height of the IPO boom. As part of its settlement with NASD and of a related case brought by the Securities and Exchange Commission (SEC), Robertson Stephens will pay $14 million to NASD and $14 million in the SEC's matter.
Robertson Stephens' wrongful profit sharing took place in the firm's Institutional Sales Department and its Financial Services Department. Customers of Institutional Sales shared profits with the firm by paying inflated brokerage commissions on unrelated listed trades. Inflated brokerage commissions were paid on thousands of transactions, mostly on the day of the IPO, or the day before or after the IPO. Hundreds of these trades were executed with commissions at $1 per share or more, in contrast to the ordinary rate for such transactions - 6 cents per share. Customers also engaged in non-economic trades to share profits with the firm. In these trades, the customer purchased a highly liquid exchange-listed security through the firm, paying an inflated commission, and immediately sold the security at another firm at the ordinary commission rate, often resulting in an immediate loss for the customer. Many of these trades were executed as "market on open" or "market on close" in order to minimize market exposure.
The firm also engaged in unlawful profit sharing with its Financial Services customers through inflated markdowns on the sale of IPO shares back to the firm. These accounts "flipped" their shares back to the firm, and paid the high markdowns even though Robertson Stephens often did not charge any markdown on principal trades.
"Profit sharing with customers in connection with the allocation of IPO shares is a serious violation of NASD rules and severely undermines the integrity of the markets," said Mary L. Schapiro, NASD's Vice Chairman and President, Regulatory Policy & Oversight. "This scheme to inflate firm commissions in return for granting hot IPO allocations corrupts the capital raising process. We will continue to look at activity in this area to ensure that NASD rules are followed and investors are treated fairly."
In 1999 and 2000, Robertson Stephens was the lead manager of more than 75 IPOs, many of which traded in the immediate aftermarket at significant multiples of the IPO offering price, one as high as 355 percent. NASD found that the firm allocated shares in these IPOs through a syndicate ranking formula weighted in favor of those accounts that generated commissions close in time to the IPO. Customer accounts paid the firm inflated commissions to increase their syndicate rank. The Syndicate Department also had discretion to allocate some IPO shares independent of the syndicate rank and, at times, provided greater allocations to accounts than they otherwise would have received based solely on their rank. NASD found that if certain accounts had not paid inflated commissions they would not have attained the necessary status according to the syndicate rank formula and Robertson Stephens would not have allocated IPO shares to them. Certain accounts receiving hot IPOs engaged in virtually no other trading through Robertson Stephens other than transactions characterized by inflated commissions paid on the day of an IPO or within a day of the IPO. Other accounts generally paid the firm's normal commission rate of 6 cents per share, and then inflated the commission rate on the day of an IPO or within a day of an IPO. Certain accounts paid more than $1 million in inflated commissions in return for IPO allocations.
NASD found that in order to obtain or increase their IPO allocations, certain institutional accounts determined a percentage of profits they needed to repay the firm, and certain accounts repaid 25-30 percent of their profits on successful IPO deals. On hot IPO days, many customers would place their orders for trades at the market's opening, but would not ascribe commissions on the trade until later in the day, after the customer determined how much money they made or would make by flipping the IPO.
Certain Robertson Stephens managers were told that the firm was sharing in profits. For example, a senior salesperson wrote to the head of Institutional Sales about an account that requested IPO shares, "Because of their uncertainty about the level of upside to the deal, rather than commit to a fixed level of incremental commission $(i.e. $10,000 per 1,000 shares), [the customer has] committed to do incremental business equal to 30% of their profit…. This is a layup."
As part of its investigation, NASD also found that Robertson Stephens failed to preserve e-mails as required by record-keeping rules. During the course of the investigation into the practices outlined above, NASD requested certain e-mails. At that time, e-mails were retained on back-up tape. However, some time after receiving these requests, Robertson Stephens overwrote a number of the requested tapes, covering an eight-month period, and internal e-mails from those backup tapes were deleted. Such e-mails were possibly both responsive and relevant to the on-going investigation and some of these e-mails could not be reproduced through other means.
NASD found that Robertson Stephens's conduct violated NASD rules:
- prohibiting member firms from sharing in the profits of client accounts;
- obligating brokerage firms to adhere to just and equitable principles of trade;
- requiring information to be filed with NASD's Corporate Finance Department;
- requiring accurate books and records be maintained by brokerage firms; and
- requiring an adequate supervisory system.
Robertson Stephens, which is in the process of withdrawing from the securities industry, neither admitted nor denied the allegations but consented to the entry of findings. NASD acknowledges the assistance of the SEC in this matter.
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.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.