It has long been known that Wall Street allocates IPO shares to its best
customers. But did the "hot" IPO market of the late 1990s give rise to
unethical and even illegal practices by major brokerage firms? Here are
excerpts from FRONTLINE's interviews with Wall Street Journal reporters
Susan Pulliam and Randall Smith, former SEC Chairman Arthur Levitt,
Fortune magazine's Joseph Nocera, veteran investment banker Bill
Hambrecht, and attorney Mel Weiss.
In this Web-exclusive analysis for FRONTLINE, Wall Street legal expert John
Coffee, a professor of law at Columbia University, offers an overview of what's
at issue in the federal investigations into IPO practices. Why does the system work the way it does? Who, if anyone, gets hurt? And what are
the prospects for reform?
Tracing the development of the IPO investigations from August 2000 to January 2002.
Celebrity Internet analysts such as Morgan Stanley's Mary Meeker and Merrill
Lynch's Henry Blodget have come to symbolize the intellectual hollowness of the
Internet bubble's headiest days. They've also become the target of many
investor lawsuits claiming that they concealed conflicts of interest as they
touted dotcom stocks on television and in print. But did analysts do anything
wrong? And how did securities analysis get to be this
way? Here are excerpts from interviews with former SEC Chairman Arthur Levitt,
former Bear Stearns analyst Scott Ehrens, Fortune magazine's Joseph
Nocera, and former CSFB analyst Lise Buyer.
Smith and Pulliam, staff reporters at The Wall Street Journal, broke the
story of the federal investigations into IPOs in December 2000 and have covered
the ongoing developments ever since. Here, in interviews with FRONTLINE in
August 2001 and January 2002, they discuss the current status of the
investigations, the background, Credit
Suisse First Boston's $100 million settlement with the SEC, key players such as CSFB's Frank Quattrone, and how the
investigations have affected Wall Street.
Chairman of the Securities and Exchange Commission from 1993 to 2001, Levitt
built a reputation as an outspoken critic of the conflicts of interest
pervading securities analysis and of how Wall Street used the financial media
and the advertising industry as conduits for stock-market hype. In this
interview with FRONTLINE producer Martin Smith, conducted in May 2001,
Levitt discusses how he approached the issue of analysts, the media, and
advertising, and argues that Wall Street's integrity is crucial to maintaining
public confidence in the financial markets.
Executive editor at Fortune magazine and the author of
A Piece of the Action: How the Middle Class Joined the Money Class
(1994), Nocera discusses what he calls the "moral degradation" on Wall Street
in the late 1990s, and says that "nobody" -- including Fortune and
The Wall Street Journal -- "thought the party was going to end."
A senior partner at Milberg Weiss Bershad Hynes & Lerach LLP, he is a
leading practitioner in the fields of securities, insurance, environmental,
antitrust, and consumer litigation, often representing plaintiffs in class
actions. His firm has filed 110 lawsuits against scores of companies and seven investment banks alleging IPO fraud and price manipulation. Weiss tells FRONTLINE that he believes the
investment banks conspired to manipulate the market by creating an illusion of
post-IPO liquidity and momentum through kickbacks and other illegal actions.
A veteran investment banker, he's the founder, chairman, and chief executive of
W.R. Hambrecht & Co. The firm's innovative OpenIPO uses the
Internet to allocate IPO shares to the public through a "Dutch auction"
process. He argues that the Dutch auction model is the best way to make the
IPO allocation process "transparent" and "nonpreferential." In 1968, Hambrecht
co-founded Hambrecht & Quist, an investment banking firm specializing in
emerging high-growth technology companies. He was the only investment banker
who would talk to FRONTLINE during the making of "Dot Con."
|speeches by arthur levitt|
||Plain Talk About On-Line Investing|
In a May 1999 speech at the National Press Club, Arthur Levitt, then chairman
of the SEC, spoke about investors' responsibilities when investing over the
Internet, online brokerages' responsibilities to their customers, and how the
SEC was responding to protect investors and help maintain the integrity of the
||Quality Information: The Lifeblood of Our Markets|
In this October 1999 speech at the Economic Club of New York, Levitt spoke of the need for "total commitment to quality
financial reporting," which he defined as "a commitment to integrity and
transparency in the way we do business; in the way we execute and report
trades; in the way companies report their financial performance; in the way
analysts communicate with companies and investors; and in the way auditors
fulfill their mandate for independent and objective oversight."
||Remarks at The Finance Conference 2000: "The New Economy"|
In a speech at Boston College in March 2000, Levitt urged investors to
maintain perspective in the midst of rapid technological change and heady
market optimism. "The retail investor," he said, "iis driving the marketplace.
But that's only half of the equation. What is driving today's investors? What
are we to make of some of the investing trends and developments today -- the
surge of day traders, growing margin accounts, the rush to buy IPOs? ... In
many respects, a culture of gamesmanship has taken root in the financial
community making it difficult to tell salesmanship from honest advice."
investigation & litigation
||SEC Charges CSFB with Abusive IPO Allocation Practices|
This press release from the Securities and Exchange Commission, on Jan. 22,
2002, announced that Credit Suisse First Boston (CSFB) will pay $100 million to
resolve the SEC's charges of IPO abuses, and stated that "CSFB also agreed to
be enjoined from future violations and to institute wide-ranging new procedures
designed to prevent a recurrence of the sort of misconduct that gave rise to
this action." You can also read the text of the SEC's enforcement action, its complaint against CSFB, and
its final judgment in the matter.
||The IPO Controversy|
"While regulators have focused primarily on alleged improprieties within the
investment banking practices at Credit Suisse First Boston, it is far more
likely that the pattern of IPO-related abuses was systemic in nature." The tech
news site Corante.com offers a collection of articles that look at "the primary
motivations (and possible transgressions) of the major participants in the IPO
controversy -- underwriters, equity research analysts, brokers, institutional
investors, technology companies, retail investors and regulators."
||Securities Class Action Clearinghouse|
This public database provided by Stanford Law School "provides detailed
information relating to the prosecution, defense, and settlement of federal
class action securities fraud litigation." In addition, it offers research
reports and analyses of how federal class action securities fraud litigation
has evolved since the passage of the Private Securities Litigation Reform Act
||The Trouble With Frank|
"Frank Quattrone was the top investment banker in Silicon Valley. Now his firm
is exhibit A in a probe of shady IPO deals." (Fortune, Aug. 13, 2001).
||Days of Reckoning|
"iin the wake of the tech wipeout, the bankers who profited most are facing the
fury of investors, politicians and regulators." (The Industry Standard,
Aug. 20, 2001)
||SEC: Analyzing Analysts Recommendations|
This SEC publication discusses the potential conflicts of interest faced by
analysts and provides tips for researching investments. The SEC warns, "As a general matter, investors should not rely solely on an
analyst's recommendation when deciding whether to buy, hold, or sell a stock.
Instead, they should also do their own research -- such as reading the
prospectus for new companies or for public companies, the quarterly and annual
reports filed with the SEC -- to confirm whether a particular investment is
appropriate for them in light of their individual financial circumstances."
||Analyzing the Analysts|
On June 14, 2001, the House Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises held hearings titled "Analyzing the
Analysts: Are Investors Getting Unbiased Research from Wall Street?" The House
website contains the testimony of experts including analysts, regulators, and
journalists. Click here for part two of the hearings, held on
July 31, 2001.
||Where Mary Meeker Went Wrong|
"She may be the greatest dealmaker around. Problem is, she's supposed to be an
analyst." (Fortune, April 30, 2001)