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Time to bring Wall Street's IPO con game to an end
© St. Petersburg Times, In the classic movie The Sting, con artist Paul Newman teams with swindler Robert Redford in 1930s Chicago to dupe a big-time crook in an elaborate fake betting parlor scheme. Some Wall Street honchos must have loved the art of the scam in that 1973 film. By the IPO boom of the late 1990s, many big investment bankers arranged initial public offerings with the same uneven playing field. Big and important investors got the closest thing to a guaranteed profit that the stock market has known: an inside track to buy IPO tech stocks at pre-public prices, sell the shares quickly and reap handsome rewards. Small investors with a yen for IPOs had to wait for the typically huge run-up in first-day IPO prices before buying shares. Guess who usually got the shaft? Wall Street brokers call that kind of favoritism "preferential allocation." Most excluded investors, the vast majority, would call it a rip-off. Which brings us to reports that Wall Street's IPO king, Credit Suisse First Boston, has agreed to pay $100-million to resolve a Securities and Exchange Commission investigation into alleged abuses in its distribution of shares of IPOs. The settlement, which would be the fifth-largest in a securities case, would end an 18-month investigation into Credit Suisse. The SEC and National Association of Securities Dealers are looking into allegations U.S. securities firms offered favored clients soughtafter stock from IPOs in 1999 and 2000 in exchange for what were essentially kickbacks and promises to buy more shares once trading began. News of the CSFB-SEC settlement, which is expected to be announced about the end of the year, was reported in Tuesday's Wall Street Journal. At least eight of Wall Street's other large brokerages also are under federal investigation into whether they allotted hot technology IPOs in return for excessive commissions and commitments to buy more post-IPO shares. Glad to hear federal regulators stopped sipping decaf and woke up long enough to do their jobs. (Two weeks ago, the U.S. attorney's office in Manhattan said it won't bring criminal charges against Credit Suisse over the firm's handling of IPOs.) The real task comes after the year-end settlement comes to light. Will the SEC issue and enforce new fairness rules on how clubby Wall Street awards shares of IPOs to its customers? (We haven't had to worry much about IPO bias lately, given the weak stock market of 2001. But IPOs are gathering steam again.) If the 1999 IPO heyday has slipped your mind with our more recent sub-10,000 Dow, let me refresh your memory. The average IPO in 1999 gained 69 percent in price on the first day of trading. That's way, way above the historic level of first-day gains of 15 to 20 percent. Credit Suisse denies wrongdoing, saying that what it did was in line with "standard industry practice." Now the investment bank, along with Merrill Lynch, Goldman Sachs, Morgan Stanley and other major Wall Street firms, face hundreds of lawsuits from investors who argue, in effect, that the IPO game was fixed against them. One of the best-known individual investors to enjoy the fruits of Wall Street's "standard industry practice" and get in early on 1999 IPO stocks is Dick Cheney. At the time, Cheney was not an IPO insider, but rather the chief executive of Halliburton, an oil services company. Cheney, of course, is now the country's vice president. By buying and swiftly reselling the stocks of nine companies selling shares to the public for the first time, Cheney made $45,992, according to trades reported on his 1999 income tax return. That's an 80 percent return on his investments through an account at Hambrecht & Quist, a San Francisco brokerage firm. One IPO stock snapped up by Cheney was Net2Phone, a company whose technology enables toll-free phone calls over the Internet. Cheney paid $15,000 for his 1,000 Net2Phone shares and sold them the same day for $26,574, a gain of $11,574, or 77.2 percent. Cheney was given the inside track to buy those shares by James Courter, a former Republican congressman from New Jersey who served as chairman of Net2Phone's corporate parent. (Last month, top Bush fundraiser Clifford Sobel resigned as chairman of Net2Phone after the Senate confirmed his appointment by the Bush administration as ambassador to the Netherlands.) In six of the nine IPO stocks Cheney bought at pre-public prices in 1999, he held his shares for less than a day. None of these deals would be available to the average investor under current Wall Street practices. Maybe that's why average investors usually stay average investors. The securities industry likes to brag that U.S. stock markets are the best and fairest in the world. But that boast has a hollow ring in the aftermath of the IPO bonanza of the latter '90s. The 1999-2000 IPO market gave birth to 637 public companies, mostly dot-coms, whose values peaked at $400-billion. Most of that has since vanished. Insiders reaped much of the profits. Small investors lured in by those first-day frenzies often ended up big losers. That's not the way to run a stock market that, in the long run, increasingly will draw basic investors looking for a fair shot at making money. It's time for Wall Street's IPO business to stop looking like a rerun of The Sting. -- Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.
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