Firm Used Analyst to Tout IPO Despite Ban

The initial public stock offering market flickered back to life Monday -- and with it came fresh outrage about the conduct of a Wall Street investment bank.

Shares of credit card processor IPayment Holdings Inc., the first IPO in months, surged 31% on their initial day of trading. But the debut was marred by the revelation that an analyst at Bear Stearns Cos., the investment bank co-managing the deal, touted IPayment shares in a so-called Internet roadshow.

That action would be a clear violation of rules agreed to by Bear Stearns and nine other investment banks two weeks ago as part of a landmark settlement with securities regulators. The rules are expected to go into effect later this year.

Coupled with recent incidents at rival brokerage firms, the episode raised new questions about whether Wall Street truly intends to reform itself after scandals involving stock analysts and IPOs.

“Just when you thought it was safe to go back into the water, ‘Jaws’ is chomping on you again,” said Tom Taulli, corporate finance instructor at USC’s Marshall School of Business. “This shows that old habits die hard.”

The incident drew a sharp rebuke from the Securities and Exchange Commission.

“It’s just astonishing to me that a firm could allow an analyst to participate in a roadshow,” said SEC enforcement director Stephen Cutler, referring to the meetings brokerage firms hold with potential investors to pitch upcoming IPOs.

The SEC threatened Bear Stearns with unspecified punishment if there were further breaches of the new rules, said a person familiar with the matter.

James Cayne, Bear Stearns chief executive, apologized to New York Atty. Gen. Eliot Spitzer on Monday, a source said.

“We fully support both the letter and, more importantly, the spirit of the recent settlement agreement,” the firm said. “We deeply regret that this unfortunate incident occurred. Once the problem was identified, we took immediate action to rectify the situation and we are taking precautions to ensure that it will not occur again.”

The incident, which was reported in the Wall Street Journal on Monday, occurred when Bear Stearns analyst James Kissane appeared in a Webcast praising IPayment.

His comments came in a presentation to Bear Stearns salespeople, said a person familiar with the matter. The presentation was taped and later viewed by some institutional investors on the Internet, the person said.

Kissane’s comments were supposed to have been deleted from the Internet presentation, the person said. Bear Stearns told regulators that Kissane would no longer cover IPayment.

Under the rules agreed to by the 10 firms in last month’s settlement, analysts are barred from appearing in roadshows, a ban intended to prevent them from becoming cheerleaders for a company.

The rules aren’t yet in effect. But regulators were incensed that the incident took place with the first IPO since the pact.

The episode took on extra weight because it followed other incidents that raised doubt about whether Wall Street realizes the extent of its infractions.

In a high-profile flap this month, the SEC scolded the head of Morgan Stanley for seeming to downplay his firm’s involvement in the analyst furor.

But some Wall Street observers gave Bear Stearns the benefit of the doubt.

“I’m sympathetic to Bear Stearns’ claim of, ‘Oops-- that was a mistake,’ ” said Jay Ritter, finance professor at the University of Florida.

IPayment’s first-day gain of 31.4%, closing at $21.02 from its offering price of $16, was the strongest opening-day performance in a year for the shaky IPO market.

“It’s an incredible surprise to see this stock come out of the gate as strongly as it did,” said David Menlow, president of IPOfinancial.com.

In addition to pent-up demand from an IPO market that has been frozen for 2 1/2 months, the IPayment deal benefited from other factors as well.

Although the Nasdaq-traded company is only “on the cusp of profitability,” as Menlow put it, the firm’s revenue has grown sharply. Also, credit card processors that are publicly traded have been performing well, giving IPayment a boost from sector strength. Alliance Data Systems Corp. is up 31.1% year-to-date, for example, and First Data Corp. up 16.8%.

The last IPO with a bigger first-day climb came a year earlier, when clothing retailer Aeropostale Inc., offered at $18 a share, jumped 54.2% to close at $27.75.

The last IPO of any kind was reinsurer Endurance Specialty Holdings on Feb. 27.

Big first-day pops are no guarantee of subsequent performance. Aeropostale closed Monday at $19.75, up 75 cents, in New York Stock Exchange trading.

And many deals still have a difficult time even getting done.

New York-based government technology contractor DigitalNet Holdings Inc. yanked its planned $100-million offering last week; on Monday, online auctioneer Dovebid Inc. of Foster City, Calif., withdrew its proposed $77-million IPO for the second time since October.

Menlow called IPayment’s performance encouraging, but not definitive.

“This is a baby step, a foundation step, but it doesn’t signal the all clear for new issues,” he said.

Taulli agreed, saying that “this looks like a good company in a good business, and I think investors responded to that.”

Experts attribute the abuses in the IPO market in part to the persistent “underpricing” of IPO shares. That’s the practice in which investment banks sell stock to initial investors at far lower prices than the shares are worth on the open market.

Critics say underwriters purposely price issues low to guarantee first-day gains, enabling them to curry favor with people receiving shares, including the executives of the companies being brought public. There have been calls for structural reforms that would force investment banks to price IPO shares closer to their open-market value.

But a soon-to-be-released report by a special committee studying IPO reforms isn’t expected to suggest such far-ranging changes. That bothers critics.

In the case of IPayment, “the stock was priced at $16, but clearly people were willing to pay more,” said Clay Corbus, head of investment banking at San Francisco-based W.R. Hambrecht & Co., which brings IPOs to market using an online auction system. “So why not price it that way initially?”