Judge Refuses to Dismiss IPO Suit Against Banks

A federal judge ruled Wednesday that a massive class-action lawsuit against Wall Street brokerages can proceed, increasing pressure on the firms to reach financial settlements with investors who lost money in the late-1990s market mania.

In a 238-page ruling, U.S. District Judge Shira Scheindlin refused a request by the investment banks and the companies they took public during the bull market to dismiss the lawsuit.

The decision is important because it paves the way for attorneys representing investors to conduct extensive discovery. Because the banks want to avoid turning over potentially incriminating documents, the ruling is likely to spur them into settlement negotiations, experts said.

“It is quite significant,” said Henry Hu, a securities law professor at the University of Texas at Austin. “There will be enormous incentives for the defendants to settle.”

The lawsuit alleges that 55 investment banks and 309 companies -- mostly start-up tech firms -- rigged the market for initial public stock offerings from 1998 through 2000. The effect, plaintiffs say, was that individual investors paid excessive prices for IPOs that caused them to suffer enormous losses when the stocks collapsed.

The banks named in the suit include Goldman Sachs, Merrill Lynch and defunct California technology specialist Robertson Stephens.

Along with a parallel case alleging antitrust violations, the class-action suit is one of the highest-profile legal battles to emerge from the bursting of the 1990s market bubble.

Scheindlin made no decision on the merits of the allegations. She simply decided that the plaintiffs should be allowed to continue pursuing their case.

However, if the allegations are proved to be true, she wrote, they describe a scheme that “offends the very purpose of the securities laws.”

Among other things, the plaintiffs allege that the investment banks awarded coveted IPOs to certain clients who agreed to pay higher-than-normal commissions. Those clients also agreed to buy additional shares once the IPOs began trading, artificially pushing up share prices, the suit says.

Because of a 1995 federal law enacted to prevent frivolous litigation, plaintiffs’ attorneys in the IPO case had been blocked from conducting discovery -- the process of examining documents, taking depositions and gathering other evidence.

Plaintiffs received some help from the trickle of leaked e-mails and other documents that emerged from the landmark $1.4-billion settlement between Wall Street firms and government regulators in December.

Some of the e-mails indicated that stock analysts touted the stocks of companies solely to lure lucrative banking work.

Nevertheless, plaintiffs’ attorneys have been anxious to conduct their own investigation and seemed delighted with Scheindlin’s ruling, which will allow them to proceed with their fraud claims against all of the brokerages and 185 of the companies.

“Now the floodgates of discovery are wide open,” said Melvyn Weiss, a lead plaintiffs’ attorney in the case.

Several investment banks refused to comment on the ruling, saying they either had not read the decision or would not comment on pending litigation.

The case ultimately could result in a settlement or court decision of “many billions” of dollars, Weiss said. Despite that, it is unclear how much money investors would see, or when they would get it. Historically, plaintiffs in such cases have received only pennies on the dollar.

“In terms of actual recovery for plaintiffs who lost money, I would not go off on a spending spree,” Hu said.

Weiss noted that, to this point, there “has been no organized settlement effort.” However, settlement talks typically do not begin in earnest until after the rejection of a dismissal motion, he added.

Many securities cases that survive dismissal motions are settled before reaching trial, Hu said.