Probe of CSFB Ends; No Charges

The U.S. attorney’s office in Manhattan has decided not to bring criminal charges against Credit Suisse First Boston over the firm’s handling of initial public stock offerings during the late-1990s IPO boom, the investment bank announced Thursday.

The U.S. attorney’s office had been investigating how CSFB allocated shares of IPOs to investors as part of a far-reaching government probe of the IPO practices of major Wall Street brokerages.

The Securities and Exchange Commission and the National Assn. of Securities Dealers still are conducting separate civil inquiries into CSFB and other brokerages. But the elimination of possible criminal action is a major step forward for CSFB, and could help the firm in its attempts to negotiate a settlement of the civil matters, experts said.

“A potential criminal prosecution is an enormous cloud and having that removed is a very significant development,” said Erich T. Schwartz, a Washington attorney and former assistant director of the SEC’s enforcement division.

The U.S. attorney’s office also reportedly dropped its criminal investigation of three CSFB brokers fired by the firm in June after the company conducted its own inquiry, according to Bloomberg News. The three--Scott Bushley, Michael Grunwald and John Schmidt--worked in the firm’s San Francisco office.

Federal regulators have been examining how Wall Street brokerages doled out shares of hot IPOs during the technology stock boom of 1998-2000.

The U.S. attorney was studying whether CSFB charged extra-high commissions to clients in exchange for coveted IPO shares, and whether those payments amounted to illegal kickbacks. The U.S. attorney reportedly convened a grand jury late last year to look into the matter.

Regulators also are examining whether some firms elicited promises from big IPO investors to buy more shares of a stock after public trading began. Such agreements could have artificially pushed up the prices that other investors paid to buy shares.

Investors may have acquiesced to the securities firms’ demands because the dramatic surges in many IPOs made getting the shares at the offering prices quite profitable.

CSFB, which long has been at the center of the IPO probe because of its leadership in tech IPOs during the boom, reportedly has been working hard to reach a settlement of the civil matters.

The NASD has told CSFB and at least six of its employees that they might be charged with violations of industry rules. In part due to fallout from the IPO investigation, CSFB’s parent, Swiss bank Credit Suisse Group, ousted CSFB’s chief executive in July and replaced him with industry veteran John Mack.

Getting beyond the specter of possible criminal charges helps CSFB in several ways, experts said.

“Criminal prosecutions of securities firms are relatively rare, so obviously that is something that anybody in the industry wants to avoid at all costs,” said Paul Gerlach, a partner at Sidley Austin Brown & Wood in Washington. “The sanctions and the stigma that attach to a criminal prosecution are much greater than a civil prosecution.”

In a statement, CSFB said it “is pleased that the U.S. attorney’s office has decided to close its investigation of CSFB’s IPO allocation practices without filing any charges.” CSFB has repeatedly denied any wrongdoing.

The conclusion of the criminal inquiry could make regulators more willing to settle the civil probes, some experts said.

“If I’m the NASD or the SEC, how do I know from a policy standpoint how hard to whack somebody if there’s a criminal probe out there?” Gerlach said. “What if I let them off with a fairly lenient sanction and they then get indicted on 20 counts of securities fraud? I look like I haven’t done my job.”

The SEC and NASD refused to comment.

As is its custom with investigations, the U.S. attorney’s office declined to comment on CSFB’s announcement.

Criminal cases are much more difficult to win in court, experts said. In a criminal case, prosecutors must prove guilt beyond a reasonable doubt. In a civil matter, they need only to have a preponderance of the evidence on their side to win.

In addition to the federal civil investigations, brokerages face scores of civil suits from individual investors who claim they were wronged by the firms’ handling of IPOs.