Firm Allegedly Manipulated Market
J.P. Morgan Chase & Co. agreed today to pay $25 million to settle charges by the Securities and Exchange Commission that a unit of the firm pressured recipients of shares in initial public offerings to buy more shares after trading began, possibly inflating stock prices.
J.P. Morgan also settled a complaint that the firm induced institutional investors to accept shares in "cold," or undesirable, offerings by promising them shares in hotter IPOs in the future, a violation of securities industry rules.
The J.P Morgan case is the latest in a series of settlements related to alleged IPO abuses during the stock market bubble of the late 1990s. In February, J.P. Morgan paid $6 million to settle charges that the firm's Hambrecht & Quist investment bank received inflated commissions from IPO recipients. The alleged abuses occurred before J.P. Morgan acquired the San Francisco bank.
J.P. Morgan also agreed to pay $80 million in April as part of a $1.4 billion settlement between regulators and 10 of Wall Street's largest firms. That settlement, which is subject to approval by a federal judge, principally addressed alleged conflicts of interest in Wall Street research. While it also addressed allegations that some firms awarded hot IPO shares in an effort to win new banking business, it did not deal with the type of the abuse alleged by the SEC in the charges settled today.
In January, FleetBoston Financial Corp. agreed to pay $28 million to settle charges lodged by NASD, the securities industry's largest self-regulatory group, that its Robertson Stephens investment-banking unit received inflated IPO commissions. Last year, Credit Suisse First Boston paid $100 million to settle charges related to alleged IPO abuses. Former CSFB technology banker Frank P. Quattrone is on trial in federal court here on a charge of obstructing justice related to the IPO case.
According to evidence presented today in that trial, the NASD suspected 20 investment firms and hedge funds of paying unusually high commissions to CSFB in exchange for shares in hot IPOs in 1999 and 2000.
In a prepared statement, SEC Associate Enforcement Director Antonia Chion said: "The IPO market must operate free from artificial influences. Any abusive allocation practices -- from extracting explicit agreements about aftermarket purchases to attempting to induce purchases in the aftermarket -- will not be tolerated."
A J.P. Morgan Chase spokeswoman said, "We are pleased that we and the SEC have settled these charges and put this matter behind us." J.P. Morgan did not admit wrongdoing as part of the settlement.
The J.P. Morgan executive said the firm would not increase its litigation reserves based on today's settlement and would not take any additional charges against earnings. J.P. Morgan will pay the $25 million out of funds already set aside for regulatory settlements.
Chion described the conduct alleged in today's complaint as an illegal attempt to violate Rule 101 of Regulation M, a part of the 1934 Securities and Exchange Act designed to protect against manipulation of the market for new stock offerings.
"What the rule is designed to protect against is that the market for the offered security is not inappropriate, that the price is not inappropriately supported or that there is some false impression created that there is scarcity or increase in demand."
The SEC complaint alleged that in 1999 and 2000, during the "restricted period" in which the firm was still allocating IPO shares, J.P. Morgan Securities Inc. "attempted to induce certain customers" to agree to make additional purchases once the stock was on the market.
According to the complaint, during the IPO allocation process for a company called Large Scale Biology, a J.P. Morgan sales representative wrote in an e-mail that she "was very aggressive in pushing [the customer] for after market action -- stressing how important it was going to be for the process." J.P. Morgan has taken no action against the sales representative.
Securities regulators continue to investigate IPO practices at other Wall Street firms, including Goldman Sachs Group Inc. and Morgan Stanley.
J.P. Morgan Chase & Co. agreed today to pay $25 million to settle charges by the Securities and Exchange Commission that a unit of the firm pressured recipients of shares in initial public offerings to buy more shares after trading began, possibly inflating stock prices.
J.P. Morgan also settled a complaint that the firm induced institutional investors to accept shares in "cold," or undesirable, offerings by promising them shares in hotter IPOs in the future, a violation of securities industry rules.
The J.P Morgan case is the latest in a series of settlements related to alleged IPO abuses during the stock market bubble of the late 1990s. In February, J.P. Morgan paid $6 million to settle charges that the firm's Hambrecht & Quist investment bank received inflated commissions from IPO recipients. The alleged abuses occurred before J.P. Morgan acquired the San Francisco bank.
J.P. Morgan also agreed to pay $80 million in April as part of a $1.4 billion settlement between regulators and 10 of Wall Street's largest firms. That settlement, which is subject to approval by a federal judge, principally addressed alleged conflicts of interest in Wall Street research. While it also addressed allegations that some firms awarded hot IPO shares in an effort to win new banking business, it did not deal with the type of the abuse alleged by the SEC in the charges settled today.
In January, FleetBoston Financial Corp. agreed to pay $28 million to settle charges lodged by NASD, the securities industry's largest self-regulatory group, that its Robertson Stephens investment-banking unit received inflated IPO commissions. Last year, Credit Suisse First Boston paid $100 million to settle charges related to alleged IPO abuses. Former CSFB technology banker Frank P. Quattrone is on trial in federal court here on a charge of obstructing justice related to the IPO case.
According to evidence presented today in that trial, the NASD suspected 20 investment firms and hedge funds of paying unusually high commissions to CSFB in exchange for shares in hot IPOs in 1999 and 2000.
In a prepared statement, SEC Associate Enforcement Director Antonia Chion said: "The IPO market must operate free from artificial influences. Any abusive allocation practices -- from extracting explicit agreements about aftermarket purchases to attempting to induce purchases in the aftermarket -- will not be tolerated."
A J.P. Morgan Chase spokeswoman said, "We are pleased that we and the SEC have settled these charges and put this matter behind us." J.P. Morgan did not admit wrongdoing as part of the settlement.
The J.P. Morgan executive said the firm would not increase its litigation reserves based on today's settlement and would not take any additional charges against earnings. J.P. Morgan will pay the $25 million out of funds already set aside for regulatory settlements.
Chion described the conduct alleged in today's complaint as an illegal attempt to violate Rule 101 of Regulation M, a part of the 1934 Securities and Exchange Act designed to protect against manipulation of the market for new stock offerings.
"What the rule is designed to protect against is that the market for the offered security is not inappropriate, that the price is not inappropriately supported or that there is some false impression created that there is scarcity or increase in demand."
The SEC complaint alleged that in 1999 and 2000, during the "restricted period" in which the firm was still allocating IPO shares, J.P. Morgan Securities Inc. "attempted to induce certain customers" to agree to make additional purchases once the stock was on the market.
According to the complaint, during the IPO allocation process for a company called Large Scale Biology, a J.P. Morgan sales representative wrote in an e-mail that she "was very aggressive in pushing [the customer] for after market action -- stressing how important it was going to be for the process." J.P. Morgan has taken no action against the sales representative.
Securities regulators continue to investigate IPO practices at other Wall Street firms, including Goldman Sachs Group Inc. and Morgan Stanley.
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