NASD Sanctions Investment Banks For IPO Violations
Washington, D.C.—NASD announced today that it has censured three major investment banks and imposed monetary sanctions of more than $15 million for engaging in improper Initial Public Offering (IPO) allocation practices. NASD found that the firms violated NASD rules when they received unusually high commissions from certain customers on listed agency trades - without inquiry and within one day of allocating shares in "hot" IPOs to those same customers.
Today's actions against Bear, Stearns & Co. Inc., Deutsche Bank Securities, Inc. and Morgan Stanley & Co. Inc. are part of NASD's continuing regulatory focus on abuses in the IPO allocation process. Bear Stearns was ordered to pay $4.95 million, Deutsche Bank was ordered to pay $5.29 million and Morgan Stanley was ordered to pay $5.39 million.
"None of these firms was providing unusual or extraordinary services to justify these very high commissions," said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "There was no legitimate reason to pay these firms millions of dollars more than other firms would charge to carry out routine trades. By accepting high payments under those circumstances, these firms failed to observe the high standards of commercial honor and just and equitable principles of trade demanded by NASD rules."
NASD found that in late 1999 and early 2000, each of the firms acted as the lead or co-lead manager in various hot IPOs. Many of these IPOs opened for trading at substantial premiums of 50 percent or more over their public offering price. Customers who obtained shares in these IPOs stood to make significant profits by selling those shares in the aftermarket. Each of the firms accepted very high commission payments for executing institutional-sized agency trades in liquid listed securities. Those commissions were far in excess of a typical rate of six cents per share. Within one day of accepting those high payments, each firm allocated hot IPO shares to those customers.
For example, in November 1999, Bear Stearns allocated 125,000 hot IPO shares to one of its customers. The share price increased over 84 percent on the first day of trading, providing the customer over $1 million in profits. On that same day, the customer sold 50,000 shares of a highly liquid listed security through Bear Stearns and paid the firm $2 per share for a total commission of $100,000 when a typical charge of six cents per share would have been only $3,000.
Similarly, in March 2000, Deutsche Bank allocated to a customer 25,000 shares of Fairmarket, Inc., a hot IPO that increased over 185 percent, from $17.00 to $48.50, on its first day of trading. Within one day of receiving these shares, this customer paid Deutsche Bank $1 per share to execute five listed agency trades and 40 cents per share for the execution of five additional listed agency trades. The customer paid the firm $800,000 for these trades, which is $737,000 more than a typical commission rate of six cents per share.
Also, Morgan Stanley allocated 1,000 shares of a hot IPO to a customer at the offering price of $35 per share. At the close of the first day of trading, the share price had increased to $212.625, providing for profits of $177,625. On that same day, the customer paid Morgan Stanley $3 per share to execute an agency trade of 20,000 shares of a listed security. This payment was $58,800 more than would have been paid at a typical rate of six cents per share.
Selected internal emails noted unusually high commissions on or near the days the firms allocated the IPO shares to these customers. For example, a broker at Bear Stearns noted that the customer is "paying $1 per today on [150,000 shares]. Happy with [hot IPO] allocation of 25,000." A Deutsche Bank email noted, "Dave @[BR] thanks you for the Foundry allocation. He is giving us a $1.00 commission on a hundred thousand shares this morning." And a Morgan Stanley email noted, "[Customer] was very appreciative of his [hot IPO] allocation. By way of other business, he bought 90,000 shares of [liquid listed security] in the aftermarket today and paid the firm .30 per share. Many thanks for your help." In settling with NASD, the firms neither admitted nor denied NASD's findings.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by contacting NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.9 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to the program by going online to www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
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