SEC proposes rules to stem IPO abuses

October 14, 2004|By BLOOMBERG NEWS

WASHINGTON - U.S. securities regulators proposed new rules aimed at stopping Wall Street investment banks from artificially spurring demand for new stock offerings.

The Securities and Exchange Commission voted 5-0 yesterday to seek public comment on the rules, which would bar underwriters from inducing customers to buy IPO shares. Underwriters wouldn't be allowed to allot hot IPOs in exchange for investor promises to buy more shares later at higher prices or less-attractive offerings.

The proposals aim to correct abuses that surfaced in the Internet stock boom that ended in mid-2000 and were criticized in SEC settlements with JPMorgan Chase & Co. and Credit Suisse Group's Credit Suisse First Boston. By explicitly prohibiting these practices, the proposals would make it easier for the SEC to win lawsuits challenging this misconduct.

"Instead of having a broad sword, the SEC would have a sharper sword to go after these abuses, and the sharper sword may save the enforcement staff some time," former SEC Commissioner Edward Fleischman, now with the Linklaters law firm in New York, said in a telephone interview.

SEC Chairman William H. Donaldson said the new rules are designed to treat investors fairly. Share prices "should be free from manipulative influence or misconduct on the part of those who brought the offering to market and who stand to profit most," he said before yesterday's commission vote.

JPMorgan, the second-biggest U.S. bank, agreed last year to pay $25 million to settle claims over allotment of IPO shares. The SEC said the bank gave shares in exchange for customer commitments to buy more once the shares started trading, a practice known as laddering that inflates demand. Credit Suisse agreed in 2002 to pay $100 million to settle charges the bank allotted sought-after IPO shares in exchange for investor kickbacks in the form of higher commissions. Neither bank admitted or denied wrongdoing.

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