Firms, Insurers to Pay $1 Billion for IPO Losses

More than 300 companies and their insurers have reached a settlement that would pay $1 billion to individuals who lost money in initial public stock offerings in the late 1990s, setting the stage for a larger legal battle between investors and Wall Street firms.

Under the deal announced Thursday, the companies -- mostly technology upstarts, many now defunct -- and their insurers would be dropped from hundreds of class-action lawsuits filed by investors who allege they were hurt by unsavory IPO practices. They say that they overpaid for IPO shares that plummeted when the bull market collapsed in early 2000.

Payments under the settlement would be made by the insurers, led by American International Group Inc.

The deal is significant for several reasons, analysts said. It would guarantee that thousands of investors receive at least some restitution for alleged IPO abuses. Though IPO infractions have drawn less public attention than the conflicts of Wall Street stock analysts, critics say they caused equally significant losses for small investors.

Beyond that, the settlement, if approved by the 309 companies’ boards and a federal judge, would strengthen the hand of plaintiffs attorneys against the 55 investment banks that remain as defendants in the IPO lawsuits, analysts said.

Plaintiffs attorneys long have considered the investment banks that handled the IPOs as the prime targets with the deepest pockets.

The Wall Street firms are accused of deliberately pricing IPOs too low, knowing that investors hungry for shares would agree to pay kickbacks in exchange for a piece of the offering.

Any damages that the Wall Street firms may pay would reduce the amount the insurers have to pay under the proposed settlement.

“The $1 billion is an enormously powerful bargaining chip in the hands of the plaintiffs lawyers because it helps suggest that there is something to the plaintiffs’ allegations,” said Henry Hu, a securities-law professor at the University of Texas at Austin. “It makes it much more difficult to make the argument that these claims are groundless.”

Investors “can have confidence that we’ll do a lot better against the investment banks,” said Fred Isquith, an investor attorney. “We’re looking for a much bigger number against them.”

The banks may have to pay as much as $5 billion to settle their part of the lawsuits, said Jim Newman of Securities Class Action Services, a New York research firm.

A spokeswoman for Wall Street defendant Citigroup Inc., the largest U.S. financial-services company, declined to comment.

Jeffrey Rudman, an attorney who represents many of the companies, said the settlement frees corporate executives to focus on their businesses rather than on litigation concerns.

The deal “takes a financial monkey off our backs,” he said.

Agilent Technologies Inc., Handspring Inc. and other defendant firms in Silicon Valley declined to comment. Defendants Drugstore.com and San Francisco-based CNet Networks Inc. also declined to comment.

At San Francisco-based Marketwatch.com, a committee of independent directors has already approved the deal, Chief Executive Larry Kramer said.

Kramer said he couldn’t discuss what Marketwatch was accused of doing wrong. But speaking generally, he said the companies were never the main target of the investors.

“The companies knew very little about how the underwriters treated their customers,” Kramer said.

“I certainly couldn’t quote you chapter and verse about what procedures existed at brokerages.”

Marketwatch went public at $17 a share and traded above $97 its first day, giving it a market valuation of $1 billion despite sales of $7 million the previous year. The stock has since fallen as low as $2.

Increasingly since the tech bust, failed or struggling firms have come to blame the underwriters. EToys Inc., Mortgage.com and Breakaway Solutions Inc., or their bankrupt estates, are among those who have argued in court that they were cheated by the brokerage houses.

Firms say that if the IPOs had been fairly priced, they would have reaped millions of extra dollars -- and some might still be in business as a result.

Under the deal announced Thursday, it will be some time before investors see any money, and it’s unclear whether they will receive meaningful sums. The process of having the companies’ boards and U.S. District Judge Shira Scheindlin in New York OK the settlement could last into next year, attorneys said.

Any payout also would have to wait for the conclusion of legal action against the banks. There are no substantive negotiations with the banks at the moment, Isquith said.

Class-action lawsuits have historically returned only pennies on the dollar to aggrieved investors, in part because of hefty lawyers fees.

“One billion is a nice big starting point, but you have attorneys fees and we’re talking about 300 companies and presumably thousands of investors,” Hu said.

Still, it may yield more for investors than the recent $1.4-billion legal settlement between securities regulators and Wall Street firms over stock-analyst conflicts.

That deal calls for a restitution fund totaling $387.5 million.