Judge May Deny Class Status for IPO Case

A federal judge in New York has threatened to deny class-action status to investors suing 55 brokerages over alleged initial public offering abuses unless the plaintiffs produce new evidence.

The order, handed down late Monday by U.S. District Judge Shira Scheindlin for the Southern District of New York, comes as Morgan Stanley and Goldman Sachs Group Inc. finalize terms of settlements with the Securities and Exchange Commission over alleged IPO “laddering,” one of the abuses cited in the lawsuit, sources close to the case said Tuesday.

The suit was brought by investors who incurred losses from investing in more than 300 IPOs. Morgan Stanley and Goldman are among the 55 brokerages accused of manipulating the IPOs, all of which occurred during the late-1990s technology bubble.

Scheindlin’s order, which Wall Street defense lawyers called a blow to plaintiffs’ attorneys, said the court record on the motions for class status was insufficient. Within two weeks, the judge ordered, plaintiffs’ attorneys must redefine the class itself and convince the court that the class definition is adequate.

“Plaintiffs’ failure to adequately respond to either aspect of this order may result in denial of the pending motions” seeking class certification, the judge said.

In addition, Scheindlin said the plaintiffs should report within three weeks on how an expert would measure what effect, if any, was exerted on stock prices by agreements that allegedly obligated investors to participate in so-called laddering.

In that practice, critics say, brokerages asked that investors who wanted to receive allocations of hot IPOs also agree to buy more of the shares once they began trading -- which could have helped to drive the stocks sharply higher, at least for a short period after the IPO date.

Lead plaintiffs’ attorney Melvyn Weiss said that the judge’s order was “absolutely not” a blow and that he would meet the judge’s deadlines.

“She’s not going to disenfranchise all these victims over this issue,” Weiss said.

Morgan Stanley and Goldman each are expected to pay about $40 million to settle allegations of laddering, although the timing of these agreements was uncertain, sources said.

The plaintiffs are already assured of getting at least $1 billion in the case under a settlement reached last year with the tech companies that issued the IPO shares and their insurers.

But failure to gain class-action status could threaten what many lawyers say could be the largest settlement to result from Wall Street’s business practices during the stock bubble.

Plaintiffs’ lawyers have said they will seek as much as $5 billion from the underwriters.

Scheindlin bolstered the case last year when she rejected defendants’ motions to dismiss the main charges.

Under the terms of the deal being discussed with the SEC, neither Morgan Stanley nor Goldman would admit or deny wrongdoing, and they would not be liable for the charges in any future civil suits, said a person familiar with the talks.

Representatives of the firms declined to comment, as did the SEC.