J.P. Morgan Settles IPO Allegations

From Reuters

J.P. Morgan Chase & Co. has agreed to pay $25 million to settle a Securities and Exchange Commission probe into allegations of unlawful allocations of initial public stock offerings, the SEC said Wednesday.

In one of several Wall Street scandals stemming from the 1999-2000 stock market bubble, the SEC accused J.P. Morgan of inducing favored recipients of hot initial public offerings to buy more of the same shares later in the open market.

The practice -- known as “laddering” -- helped to ensure that the price of a hot IPO would continue to climb after its debut, assuring profits for participants in the scheme, said lawyers familiar with the SEC investigation.

“This case is yet another example of the commission’s resolve to vigorously enforce those rules designed to ensure that the IPO allocation process and IPO market are fair to all investors,” SEC Enforcement Director Stephen Cutler said.


J.P. Morgan neither admitted nor denied wrongdoing in the SEC settlement involving its securities unit. The terms of the settlement are subject to court approval.

“We are pleased that we and the SEC have settled these charges and put this matter behind us,” J.P. Morgan spokesman Joe Evangelisti said.

The $25-million civil penalty levied by the SEC equaled less than 1.4% of J.P. Morgan’s net profit of $1.83 billion for the second quarter of 2003.

Laddering -- like the practice of “spinning” hot IPOs to favored investment banking clients -- was common during the turbocharged years of the market bubble, investigators said.


Authorities for months have been probing the secret deals that they said helped fuel some of the highest-flying, boom-years IPOs, which often victimized average investors.

Further legal actions involving other investment banks are likely, lawyers said.

SEC enforcement official Antonia Chion said, “Any abusive allocation practices -- from extracting explicit agreements about aftermarket purchases to attempting to induce purchases in the aftermarket -- will not be tolerated.”

Investigators said banks induced favored clients to make laddering commitments by promising them continued access to future IPO allocations or other favors. They said the banks also followed up to check on whether clients had fulfilled their promises to buy more IPO shares after their debut.


In the J.P. Morgan-backed IPO for Bay Area biotechnology company Large Scale Biology Corp., the SEC said, “A sales representative reported in an e-mail that she was ‘very aggressive’ in pushing [the customer] for aftermarket action -- stressing how important it was going to be for the process.” Large Scale, which went public at $17 a share in August 2000, closed Wednesday at $1.22, up 2 cents, on Nasdaq.

Other IPOs cited by the SEC included Dyax Inc., Medicines Co. and Genentech Inc.

Banks that underwrite IPOs are prohibited over a restricted period from bidding for or buying the IPO shares or inducing others to do the same.

Most of the IPO abuses that J.P. Morgan executives were accused of carrying out occurred in the bank’s New York, San Francisco and Chicago offices, the SEC said. J.P. Morgan’s stock gained $1.05 to $35.38 in New York Stock Exchange trading Wednesday.