3 investment banks penalized over IPOs

$15 million assessed in penalties

NASD issues censure

May 19, 2004|By BLOOMBERG NEWS

NEW YORK - Morgan Stanley, Deutsche Bank AG and Bear Stearns Cos. were assessed penalties totaling more than $15 million and censured by the National Association of Securities Dealers yesterday for collecting outsized commissions for allocating shares of initial public offerings to favored clients.

The companies violated regulatory rules by accepting commissions "far in excess of the typical rate of 6 cents a share" from customers one day after selling them shares in IPOs, the association said. Morgan Stanley will pay $5.39 million, Deutsche Bank will pay $5.29 million and Bear Stearns will pay $4.95 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. The brokerages had a duty to investigate why they were receiving such large payments for routine trades, she said.

Securities companies have come under scrutiny by the NASD, the Securities and Exchange Commission and state regulators over allegations that they doled out shares in IPOs to win business from investment banking clients.

In January 2002, Credit Suisse First Boston agreed to pay $100 million to settle conflict charges with regulators, including claims that the bank demanded kickbacks of up to $3.15 a share from investors seeking IPO shares.

The companies are pleased to have reached the settlement with the NASD, said spokeswomen Melissa Stonberg of Morgan Stanley, Rohini Pragasam of Deutsche Bank and Elizabeth Ventura of Bear Stearns. The companies didn't admit or deny wrongdoing.

Morgan Stanley will pay $4.9 million to the NASD for profits it made from inflating commissions for 25 customers and a $490,000 fine. Deutsche Bank agreed to give up profits of $4.81 million and pay a $481,000 fine. Bear Stearns will relinquish $4.5 million and was fined $450,000.

In November 1999, Bear Stearns, the seventh-largest securities company, allocated 125,000 shares in an IPO to one customer, generating more than $1 million in profit for the client, the NASD said.

Later that day, that client sold 50,000 shares of a widely traded stock and paid a commission of $2 per share, or $100,000. That trade should have cost 6 cents a share, or $3,000, the NASD said.

In March 2000, Deutsche Bank sold 25,000 shares of online auction operator Fairmarket Inc. to a customer. The stock soared 185 percent, to $48.50 from $17, in the first day of trading. The next day, the customer paid Deutsche Bank $800,000 for trades of listed stocks that would usually have warranted a commission of $63,000, the NASD said.

Morgan Stanley, the second-largest securities company, sold a client 1,000 shares of an IPO for $35 a share. The stock closed at $212.62 at the end of the day. The same day, Morgan Stanley got $3 a share for trading 20,000 shares of a listed security, $58,800 more than the commission would have been at the rate of 6 cents a share.

"These violations took place during the bubble," Barry R. Goldsmith, head of NASD enforcement, said in an interview. "When investors are paying $1, $2 or, in one case, $3 a share in commissions, we can't just sit there and accept them."

The NASD gave examples of e-mails at all three companies that noted evidence of the unusually large commissions and customer satisfaction with the IPO profits.

NASD has brought several other cases in the area of IPO practices. Last year, it censured and imposed fines of $27 million against Robertson Stephens & Co. and $6 million against J.P. Morgan Chase & Co. for sharing profits from IPOs.

NASD also has a complaint pending against Invemed Associates LLC, a New York investment bank. That firm, headed by Home Depot Inc. co-founder Kenneth G. Langone, 68, is suspected of charging commissions as high as $8 a share to customers for IPO shares.

Invemed's sales representatives received about 50 percent of these inflated commissions in 1999 and 2000, the NASD said in April last year.

Former NASD prosecutor Christopher J. Bebel, a partner at the law firm Sacks Bebel & Boll in Houston, said the penalties are not high enough to prevent the brokerages from repeating the violations.

"Given the extent to which the integrity of the financial markets have been tarnished, it's perplexing the fines were set at such a relatively low level," Bebel said. "Firms may be inclined to believe from this decision that you can still reap enormous profits by overlooking inflated IPO commissions, even with the penalty factored in.

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