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Thu, Feb 17, 2005 - Page 12 News List

Settlement targets investment banks

INVESTORS UPBEAT A judge's approval of a US$1 billion settlement between public companies and investors who lost in the 1990s tech boom leaves banks vulnerable


Legal storm clouds gathered over Wall Street on Tuesday when a federal judge granted preliminary approval to a US$1 billion settlement between nearly 300 companies that went public during the 1990s technology boom and investors who say they were defrauded.

The agreement leaves 55 investment banks as the investors' main target.

According to the investors, the 55 banks awarded shares in hot initial public offerings to favored clients, made deals with institutional investors to buy the shares after they started trading to drive up their price artificially, and issued bogus research to win the deals in the first place.

The settlement limits the companies' exposure in the case. If the investors recover more than US$1 billion from the investment banks, the companies will not have to pay. If the amount is less than US$1 billion, they must pay the difference.

As part of the agreement, the companies agreed to cooperate with the investors' lawyers, a development that Judge Shira Scheindlin noted in a 52-page opinion issued in US district court in Manhattan on Tuesday.

"The value of 298 willing allies in litigation, as opposed to the specter of hundreds of uncooperative opponents, is significant," she wrote.

Alan Bromberg, professor of securities law at Southern Methodist University, commented, "It's a significant development in shifting the cost and therefore the responsibility from the companies to the underwriters." He added that "the court is accepting the fact that if you look back to the IPO bubble of the '80s and '90s, it was primarily the responsibility of the underwriters; the companies took advantage of it, but they weren't the prime moversv."

Gandolfo DiBlasi, a partner in the law firm of Sullivan & Cromwell who represents Goldman Sachs in the IPO case and has acted as a liaison for the group of defendant banks, declined to comment on the decision.

The banks have sought to end the case. Early in 2003, Scheindlin denied requests by the banks for dismissal, arguing that the investors "put forth a coherent scheme by underwriters, issuers, and their officers to defraud the investing public."

Last year, the banks tried to block the agreement between the companies and the investors, arguing that it encouraged collusion between the parties, creating an incentive for the companies to implicate the investment banks while at the same time reducing their own exposure.

"This argument lacks merit," the judge ruled.

Melvyn Weiss, chairman of the investor plaintiffs' executive committee, said the judge's action on Tuesday was significant because she "preliminarily approved a billion-dollar partial settlement which the underwriter defendants were fighting to destroy."

He added, "It gives our clients the ammunition to continue to fight the 55 biggest investment banks."

The companies, mostly technology start-ups, reached an agreement in principle in June 2003, when they agreed to pay the US$1 billion to investors who had been harmed. The parties hammered out a formal agreement last year.

Wall Street firms have faced a steady stream of litigation since the technology bubble burst, and the banks' role in assembling deals and delivering them has come under tremendous scrutiny. Many investment banks have settled separate cases with the Securities and Exchange Commission, NASD, and the New York Stock Exchange with respect to claims in the initial public offering class action.

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