Category Archives: IPO Allocation Cases

Issuer Settlement In IPO Allocation Cases Approved

The plaintiffs and the issuer defendants in the IPO allocation cases have obtained preliminary court approval of their $1 billion settlement, originally agreed to back in June 2003. The cases were brought against nearly 300 companies and 55 investment banks involved in initial public offerings during the tech boom. The plaintiffs generally allege that the defendants ramped up trading commissions in exchange for providing access to IPO shares and required investors allocated IPO shares to buy additional shares in the after-market to help push up the share price. The Washington Post has an article on the court’s decision.

Quote of note (Washington Post): “‘Despite the apparent magnitude of the billion-dollar guarantee, this settlement is not solely — or even primarily — about monetary recovery,’ Scheindlin said. The judge said the real value is in the companies’ agreement to aid the investors’ suits against the banks. The start-ups also agreed to allow investors to file suits to pursue the companies’ claims that the banks didn’t raise enough money in the IPOs. ‘The value of each of these benefits should not be understated,’ Scheindlin wrote. The Internet companies ‘know far better than the plaintiff classes precisely what occurred in the period leading up to and including their IPOs.'”

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Court Grants Class Certification In IPO Allocation Cases

Reuters reports that the S.D.N.Y. court presiding over the IPO allocation cases has granted class certification in six “focus” cases that have been used to test the sufficiency of the overall allegations. The plaintiffs have sued underwriters in connection with over 300 initial public offerings. The cases generally allege that the defendants ramped up trading commissions in exchange for providing access to IPO shares and required investors allocated IPO shares to buy additional shares in the after-market to help push up the share price.

Quote of note: “U.S. District Judge Shira Scheindlin said that if she had rejected the class action request, the companies ‘would have essentially defeated the claims without ever having been compelled to defend the suits on the merits. In their zeal to defeat the motion for class certification, defendants have launched such a broad attack that accepting their arguments would sound the death knell of securities class actions.'”

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IPO Allocation Cases Hit Bump In The Road

Will the IPO allocation cases be granted class certification? It seems likely, but the S.D.N.Y. has asked the plaintiffs to provide the court with more information before it will let them proceed against the 55 investment banks named in the suits.

According to a Reuters report, Judge Scheindlin issued an order on Monday giving the plaintiffs two weeks to “redefine the class and convince the court that the definition is adequate.” Moreover, one of the plaintiffs’ primary claims is that the investment banks engaged in “laddering,” a practice in which the banks allegedly handed out IPO shares to buyers who promised to buy more shares at higher prices once the stocks began trading publicly. The alleged goal was to put additional upward pressure on the stock prices. As to these claims, the court stated that the plaintiffs “should report within three weeks on how an expert would measure what effect, if any, was exerted on stock prices” by the alleged laddering.

Quote of note: “In her order, Judge Scheindlin said the court record on whether to grant class status is insufficient in two ways and set tight deadlines for plaintiffs to fill in the gaps. ‘Plaintiffs’ failure to adequately respond to either aspect of this order may result in denial of the pending motions’ seeking class certification, the order said.”

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Discovery Of Wells Submissions, Loss Causation, And The IPO Allocation Cases

The WorldCom and Initial Public Offering securities litigations in the S.D.N.Y. are generating judicial opinions on a wide variety of topics, with the plaintiffs frequently getting the better of the argument. Two more opinions have come down from Judge Scheindlin in the IPO allocation cases over the holidays.

Discovery of Wells Submissions

On December 24, the court issued an opinion and order addressing whether “Wells submissions” to the SEC are discoverable in subsequent litigations. The target of a SEC investigation is permitted to file a written submission, known as a Wells submission, with the agency to respond to contemplated charges. The plaintiffs were seeking discovery of Wells submissions made by the underwriter defendants in connection with the SEC’s investigation of the same IPO allocation practices at issue in the current litigation. Although the Wells submissions contained offers of settlement, the court found that they are not “settlement material” and, in any event, they are relevant to the current litigation and therefore discoverable.

Quote of note: “Offers of settlement, however, are not intrinsically part of Wells submissions, which were intended to be ‘memoranda to the SEC presenting arguments why an enforcement proceeding should not be brought.’ To the extent that a respondent may make a settlement offer, that offer is typically clearly identified and thus easily severable from the remainder of the submission.”

Holding: The underwriter defendants are ordered to produce their Wells submissions to plaintiffs on or before January 20, 2004.

The New York Law Journal has an article (via law.com – free regist. req’d) on the decision and the Securities Litigation Watch has a post.

Loss Causation

On December 31, the court issued an order and opinion addressing a motion for judgment on the pleadings by the underwriter defendants. The underwriter defendants argued that the Rule 10b-5 claims against them should be dismissed in light of the Second Circuit’s recent decision on the pleading of loss causation in securities fraud cases. In Emergent Capital, the Second Circuit held that allegations of artificial price inflation, without more, do not suffice to plead loss causation. (The 10b-5 Daily has posted about the decision and the current circuit split on this issue.)

In the IPO allocation cases, the underwriter defendants “allegedly required or induced their customers to buy shares of stock in the aftermarket as a condition of receiving initial public offerings stock allocations.” This conduct allegedly caused the plaintiffs to purchase the stock at an artificially inflated price. The plaintiffs have brought claims, based on different provisions of Rule 10b-5, for (1) market manipulation and (2) material misstatements and omissions.

Although the Emergent Capital decision requires more than price inflation to adequately plead loss causation (e.g., a corrective disclosure revealing the fraud and causing a stock price decline), the court noted that it is a material misstatements and omissions case. Market manipulation, the court argued, is simply different.

“A market manipulation is a discrete act that influences stock price. Once the manipulation ceases, however, the information available to the market is the same as before, and the stock price gradually returns to its true value. . . In market manipulation cases, therefore, it may be permissible to infer that the artificial inflation will inevitably dissipate. That being so, plaintiffs’ allegations of artificial inflation are sufficient to plead loss causation because it is fair to infer that the inflationary effect must inevitably diminish over time. It is that dissipation — and not the inflation itself — that caused plaintiffs’ loss.”

The court offers no citations for this analysis and it certainly reaches some broad (and potentially controversial) conclusions. As for the remaining misstatements and omission claims, the court concedes that Emergent Capital is directly on point, but simply bootstraps the claims into its earlier loss causation analysis: “The content of Underwriters’ misstatements was, in essence: ‘this is a fair, efficient market, unaffected by manipulation.’ In fact (according to plaintiffs), the market was manipulated. For the reasons discussed [] above, that market manipulation was a cause of plaintiffs’ loss. Therefore, the misstatements that concealed that manipulation also were a cause of plaintiffs’ loss.” But if the plaintiffs have brought separate fraud claims based on alleged misstatements, don’t they need to establish that the alleged misstatements, separate and apart from the market manipulation, caused a loss? Apparently not.

Holding: Motion for judgment on the pleadings denied.

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IPO Suits Alleging Price-Fixing Dismissed

The Associated Press reports that District Judge Pauley of the S.D.N.Y. has dismissed two class actions alleging price-fixing in connection with high-tech initial public offerings. The anti-trust cases, brought in 2001 against ten investment banks, addressed the same claims of stock price manipulation and commission kickbacks as in the related IPOallocation cases. The article states “Pauley ruled Monday that the charges made by investors in the suits are immune from antitrust law and fall to federal securities regulators to decide.”

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Twenty Percent of $1 Billion Is Still A Lot

Securities Litigation Watch has a post on a decision by Judge Scheindlin of the S.D.N.Y. to reduce the proposed attorneys’ fees in the Independent Energy Holdings case from 25% to 20% of the recovery. The court evidently “suggested that the contingency risk asserted by plaintiffs’ counsel as part of the justification for fees is ‘often inflated.'”

It is difficult to figure out the best methodology for measuring contingency risk. Judge Scheindlin appears to have cited overall settlement rates for securities class actions, but that statistic does not provide much information about the contingency risk faced by a plaintiffs’ firm in the particular case before the court. (Securities Litigation Watch also notes that the overall settlement rates used in the decision appear to be out-of-date.)

In any event, Judge Scheindlin’s willingness to reduce the requested attorneys’ fees in a securities class action settlement may be a source of concern for the plaintiffs’ bar. The judge presides over the IPO allocation cases, where the investors are already guaranteed a recovery of at least $1 billion.

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Plaintiffs’ Perspective

The Associated Press has a lengthy interview with Mel Weiss of Milberg Weiss, the leading plaintiffs’ securities class action firm.

Quote of note:

Interviewer – “How big was the $1 billion settlement for ordinary investors in the IPO fraud case in your view? How much do you hope to get from the brokerages?”

Weiss – “The billion dollars is an expression of concern that these allegations are real and could give rise to staggering liability. It simplifies the litigation in that we can focus our attention on the conduct of the investment banks. The interesting part here is how much broader our inquiries will be than the government’s has been because we’re covering 55 banks, not 10. It’s going to be far more fascinating to demonstrate that the conduct we allege to be serious violations of the law was widespread throughout the entire industry. … I would be very disappointed if we don’t achieve multiple billions (in recovery).”

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