Three Banks Agree to Settle IPO Probes

Three of Wall Street’s largest investment banks agreed Tuesday to settle investigations into whether they improperly allocated shares in lucrative initial public offerings to customers that paid oversized trading commissions.

The agreement by Morgan Stanley, Deutsche Bank and Bear, Stearns & Co. to pay more than $15 million shows how Wall Street continues to pay for past IPO transgressions, even as the market for new-stock offerings is finally recovering from a three-year slump.

The probes by the NASD, an industry organization that regulates brokerage firms, centered on whether the firms gave coveted IPO shares to hedge funds in exchange for enormous commissions to trade other, more liquid stocks -- in effect, whether the investment banks took what amounted to kickbacks.

The high-commission trades, which came at the height of the bull market in late 1999 and early 2000, frequently were done within a day of the hedge funds’ receiving the IPO shares.

“The hedge funds eagerly offered these commissions in order to get very prized and scarce” IPOs, said John Coffee, a Columbia University law professor.

Though it normally costs no more than 6 cents a share to trade highly liquid stocks, some IPO investors paid $1 or more a share, the NASD found.

For example, Morgan Stanley gave one customer 1,000 shares in the IPO of technology company Webmethods Inc., according to the NASD. From an IPO price of $35, the stock soared to more than $212 on its first day of trading in February 2000, an immediate profit of $177,625.

The same day, according to the NASD, the customer paid Morgan Stanley $3 a share -- or $60,000 -- to trade 20,000 shares of Tiffany & Co. At a normal 6-cent rate, the commission would have been only $1,200.

“None of these firms was providing unusual or extraordinary services to justify these very high commissions,” said Mary Schapiro, vice chair of the NASD, formerly the National Assn. of Securities Dealers.

“There was no legitimate reason to pay these firms millions of dollars more than other firms would charge to carry out routine trades.”

The paying of outsize trading commissions is one of several unsavory practices that securities regulators have cracked down on in the aftermath of the late-1990s IPO frenzy.

In late 2001, another major investment bank, Credit Suisse First Boston, paid $100 million to settle similar investigations by the NASD and the Securities and Exchange Commission.

Those probes have continued to reverberate. This month, former CSFB banker Frank Quattrone was convicted in federal court of trying to obstruct an investigation by the SEC and a grand jury.

In the latest pacts, Morgan Stanley agreed to pay $5.39 million. That includes a $4.9-million disgorgement of improper trading commissions received from about 25 customers and a $490,000 fine.

Deutsche Bank is disgorging $4.81 million and paying a $481,000 fine.

Bear Stearns is disgorging $4.5 million and paying a $450,000 penalty.

Company representatives declined to comment, except to say they were happy the probes were resolved. The firms neither admitted nor denied wrongdoing.