Once that's done... "OK, now you can have your 1000 shares, but you have to buy
three for every one I give you." Then on top of that, if the market really
takes off and there is a tremendous amount of profit for the investor, for the
IPO purchaser, then you have to kick back a certain percentage by creating more
washed transactions to create commission income for the investment banker.
So these are the different things that were going on. They really started in
earnest in the last three years of the bull market, because that's when the
game really got interesting. The product wasn't so great. They had to create an
illusion of post-IPO offering liquidity and momentum, and this is the way they
You sound as if you are saying there was a conspiracy at work here. Did it
have the trappings of a classic conspiracy? Did people get together and plan
Yes, and we allege that in our antitrust action, which we filed a couple of
weeks ago. The thing about this market is that it combined a lot of different
elements. Not only did the practices that I just described become routine; but
then they had to gussy it all up with a rationale. So they had their analysts
start creating new language -- "a new economy," "emerging markets." They
started to talk about the Internet and how tremendous this is going to be for
All they were doing was really creating a machine to raise money for companies
that subsequently failed. But the fact is that it gave a rationale at that
point in time for people to believe that a stock could go from $6 to $60, or
from $15 to $300 -- and that was logical.
If they didn't create that language and that rationale, then people would have
not believed it. So you know all of these learned investment banker-types are
saying the same things. It's on CNBC. It's on every other TV program that hypes
the market and talks about the market. And people got to believe. They actually
were believing what they were doing.
... Was there a conspiracy? Think about how the market operates. You have a
handful of leading investment banking firms. They become the managing
underwriters. OK? The managing underwriters form syndicates. If you take a
look, the same underwriters are either the co-managers or in the syndicates in
many, many deals. So there's a lot of cross-dissemination of ideas, of
practices, of strategies. And one has to rub the shoulder of the other in order
to get into the next deal.
So they're all doing pretty much the same things. If they weren't doing the
same things, they couldn't get away with it, because somebody, some honest
broker, would have to blow the whistle at some point. So everybody was is in on
The alternative to the conspiracy theory is that the technology was truly
exciting to people, and like other boom parts of cycles, there was this
excitement. It was infectious, and everybody believed it. And analysts and
bankers and venture capitalists all got behind these entrepreneurs, and they
got carried away.
I think that happened also because they started to believe in their own BS. One
thing I've learned is that most people who are in these executive positions and
create massive losses for investors because of artificial reporting of earnings
or product development or future prospects start believing their own BS. ...
They also start believing that, even if they're not telling the truth about
something today, they'll be able to cure it tomorrow, so it won't harm anybody.
I don't think they're really out to cause people losses. But they lose control
of their own of their own judgment. ... I truly believe that.
The problem that we have from time to time is that our government doesn't keep
attenuated to that thought, and starts permitting itself to believe that,
without oversight and without controls by governmental entities like the
Securities and Exchange Commission, people that will act in a positive,
rational fashion when it comes to honesty and integrity in a business
[Fraud] happens, unfortunately, and far too often. And if we keep our guard
down, it's going to happen in massive ways. And I think that's exactly what
happened with the SEC and with the federal government. When the Republicans
came in and they passed this reform act, the Securities Reform Act in 1995,
they sent out a signal: "We're not going to police you. We're not going to look
at your conduct." ...
We are interviewing Arthur Levitt, the former chairman of the SEC. What do
you suggest we ask him?
I think that you can ask Arthur whether he ever really believed he had the
sufficient resources to take care of the problems that I've just described.
Like any other executive, you have to use your resources in areas that you
think you can be most efficient. He did it in other ways, in other areas of
need. He left basically the policing of the kind of wrongdoing that I'm
describing to the private sector, meaning the private litigation arena. ...
Let's get back to the nitty-gritty of these allegations. What is wrong with
an investment banker rewarding their best customers with allocations?
If that's all they do, it probably isn't wrong. If they say, "OK, you are my
best customer, so I am going to give you x number of shares on the offering,"
that's business. But when you couple the giving of the shares to a customer
with a kickback with a requirement that they buy in the aftermarket even though
it's a wash transaction -- it's just a transaction to create an illusory market
-- that's wrong. That's a manipulative device.
Keep in mind also that there's a limit on what investment bankers can make as
fees and commissions -- compensation on an offering. So let's say ... it's a 7
percent amount. Instead of making 7 percent on these offerings through these
extra commissions, both upfront and after the fact, I've been told that a $4
1/2 million deal for the underwriter -- in other words, what the underwriter
would normally make $4 million on -- they can make $20 million or $30 million
because of all of the kickbacks.
Describe again for me, if you can, the kickback. What are they getting?
There are several different kinds. Can you name them and go through
One is an upfront price for entry. "I want to get an allocation from your IPO.
What do I have to pay you?" The underwriter says, "You have to produce x
dollars in commission income up front before any deal takes place. When you
show me that good faith, then I will start giving you an IPO allocation. In
addition to that, for every one share I give you in the IPO allocation, you
have to commit to buy three shares in the aftermarket. And then on top of that,
if you make a lot of profit in the aftermarket, I want you to give me back 20
percent, 35 percent of what you make." ...
In addition to all of that, I have heard that there are venture capitalists who
are also members of the underwriting firms. In other words, the underwriter has
somebody in the company that has been a venture capital investor in the deal.
That venture capitalist has an interest in having his stock go up more quickly,
because in a lot of these deals, there is a lockup provision -- that the
venture capitalist can sell in the aftermarket for a certain period of time
unless the stock goes up a certain percentage after the offering.
So if it doubles, for instance, it might create an end to the lockup period,
and the venture capitalist can sell his or her stock immediately at that point,
which is what the venture capitalist wants to do; because if you think about
it, the VC investor got in for pennies on a relative basis, and is probably a
long-term holder. From the time the VC investment is made until the time the
offering takes place, more than a year has passed. So they're getting long-term
capital gains -- and they're getting huge returns.
So the general public is left holding the bag?
Because they are hyped to come in and prop up this whole pyramid?
Right. And as I said before, Wall Street is creating a rationale to make it
appear as if it's logical for these stocks to go up, because there's a new
economy, there's new emerging markets that are opening up.
... When we get in as litigators, we're able to see what really was happening
at the company. And we can take frequently a timeline and the market
performance of the stock, show what was said about the stock, either by the
company or by the analysts, and show what the inside documents actually reflect
at that point in time. And frequently the statements about the company are
diametrically opposite from what was really happening.
With respect to the practices and how they went about getting the kickbacks,
there were two other ways that they were doing it. One was by charging rates of
interest that were peculiarly high for the kinds of businesses that they were
doing with these customers. The other way was charging higher commissions for
These people think they were so clever, you know, that they can just cover up
what they were doing by having business together. But if you take a look at the
amount of business that some of these customers did pre the IPO allocations and
post the IPO allocations, you'll see that suddenly the interest rate charges
and the commissions on each transaction went up.
Interest rate charges? What are those?
On debit balances. The customer who got the IPO allocation has a debit balance,
so it owes money to the investment banking firm. And on that money, there's an
So who was doing this?
Well, the allegations in our complaint name many of the biggest investment
banks; which is different from historical allegations of this type where fringe
players were the ones who were engaged, or at least they were the ones that
were being fingered.
Now there are investigations that are ongoing with respect to CS First Boston,
Morgan Stanley, Merrill Lynch -- I mean, these are the biggest players. And
that's what makes this so shocking -- that it could infect even institutions of
that size -- Goldman Sachs. These are revered institutions in Wall Street. But
the profit from these activities became so enormous that the temptation to do
it was just overwhelming. ...
So what is different [this time] and how upset should people be about
I think they should be very upset, because the investment banker is supposed to
be a watchdog in the role of the underwriter. It's supposed to do due
diligence. It's supposed to protect its customer. It has a know-your-customer
rule. It has been invested with the ability to make money if it does the right
thing by the investor. It is supposed to be looking for quality; or if it's not
quality, to tell all of the truth about the product, so people can make an
informed investment decision.
What is different here is that our typical case under the federal securities
laws deals in the company's statements about itself. If it makes a material
misstatement or omission about its financial results about its prospects, about
its product development, its expectation as a competitor within the industry,
and it is either recklessly made or made intentionally false, then we can bring
an action. And if it's in the prospectus and the underwriter fails to do his
due diligence, then we can sue the underwriter as well, and sometimes the
accountants with respect to the expertized portion of the prospectus.
But here we're dealing with a market manipulation by, not the issuer, but the
underwriter, by the investment banking community. And that's the scary thing --
that the investment banking community that has a fiduciary responsibility and a
statutory responsibility to protect the customer is actually creating the
artificiality in the market. ...
When I talk to people down on Wall Street or Silicon Valley, they say,
"Milberg Weiss -- they just sue everybody, and then some of it sticks."
... Silicon Valley has good reason to try to demonize Milberg Weiss, because
there are no other policemen looking at them in the same way as we are. So they
are trying to discredit us. ...
Approximately how many cases have you filed against companies with
precipitous stock drops that you have pending today?
Let's look at the whole number of filings nationwide by all law firms. It's
probably about 250 to 300 a year. That's all. And when you think about the
number of securities transactions and public statements by companies, which are
in the thousands, that's not a big number. And if you take a look back at 1975,
the number of lawsuits filed in those days was approximately the same number --
So with the explosion in capital formation, with the huge increase in IPOs and
numbers of publicly traded companies, you would think that that 200 would be
1,000 or 2,000 today. And it's not. So Silicon Valley is creating an illusion
of a litigation explosion. But there isn't. And the reason why they're
squealing like stuck pigs is because they are used to having the world to
And if you take a look at the number of companies in Silicon Valley who only
reported a profit for one quarter in their whole corporate life -- and it
happened to be the quarter when they were going public -- it would surprise
home · ipo game · crying foul · beyond the bubble · historical perspectives
discussion · interviews · readings & links · producer's chat
FRONTLINE · wgbh · pbs online
some photographs copyright ©1998 sam bailey
web site copyright 1995-2013 WGBH educational foundation