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Investors settle Web IPO suits

Razorfish Inc, Red Hat Inc, and 307 other companies that went public during the Internet boom of the late 1990s reached a US$1 billion settlement with investors who said their stock offerings were rigged.

The settlement announced today in New York resolves claims that the companies conspired with 55 investment banks to drive up shares in their initial public offerings.

Investment banks including Goldman Sachs Group Inc and Credit Suisse First Boston Inc that were IPO underwriters now come under pressure to settle since the companies will cooperate with investors and turn over documents and other evidence to be used against them, lawyers said.

"The primary target in these cases is the underwriter community," said Melvin Weiss of Milberg Weiss Bershad Hynes & Lerach, which represents the investors. "This gives us a huge booster shot in our litigation against them."

Investors who bought shares after trading began in the IPOs say banks had secret deals requiring their clients to keep buying as prices rose, creating artificial demand until the stocks eventually collapsed. Recipients of IPO shares had to kick back some profits to brokers, and the banks failed to reveal those secret payments, the plaintiffs claimed.

Forty-two primary insurers are obligated to pay the companies' settlement, though they aren't required to hand over any money until the claims against the banks are resolved, according to one of the investors' lawyers, Rebecca Katz.

As part of the settlement, companies suing their IPO underwriters agreed to assign their claims to the investors, a statement by the investors' lawyers said.

For the banks, that means their former allies now "are likely to be helpful to the plaintiffs," said Larry Soderquist, a securities law professor at Vanderbilt University in Nashville.

US District Judge Shira Scheindlin is overseeing the IPO suits and must approve the settlement.

The suits also target analysts at the banks, accusing them of issuing rosy projections of the start-ups' prospects to gain lucrative banking business for their firms.

The settlement follows a yearlong mediation and was brokered by Nicholas Politan, a former federal judge from New Jersey, according to a statement by lawyers for the investors.

If the plaintiffs ultimately recover more than US$1 billion from the underwriters, the companies' obligations will be satisfied by whatever investors get from the banks, according to the statement.

A telephone call to Gandolfo DiBlasi of Sullivan & Cromwell, the investment banks' lead lawyer, wasn't immediately returned.

During the IPO frenzy, investment banks reaped billions in fees after raising about US$130 billion for the companies they brought to market. Investors who received IPO shares profited from selling stock as prices soared, though many of the stocks later plunged and the companies declared bankruptcy.

First day gains from IPOs averaged 87 percent in 1999 and 71 percent in 2000, according to IPO researcher CommScan LLC.

Red Hat, the world's biggest distributor of the free Linux computer operating system, had its initial offering in August 1999 at US$14 a share. The share price rose to US$56.75 on its first day of trading. Red Hat shares rose US$0.07 to US$7.92 at 3:40pm in trading on the NASDAQ Stock Market.
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