The frenzy and tumult associated with initial public offerings (IPOs) by young, high-tech companies during the Nasdaq bull market of 1998 to 2000 first fascinated America and then, as the market soured, provoked massive recriminations, including enforcement proceedings by the Securities and Exchange Commission (SEC) and even a criminal investigation by the United States Attorney for the Southern District of New York. Although the criminal investigation was ultimately dropped, the SEC has negotiated a $100 million settlement from Credit Suisse First Boston (CSFB) of charges brought by the SEC and the National Association of Securities Dealers (NASD) that the firm demanded excessive or unlawful brokerage commissions in return for IPO allocations. The SEC also continues to investigate allegations that various underwriters manipulated stock prices by tying IPO allocations to mandatory purchases of the same stock in the secondary market (a practice known as “laddering”), and numerous private class actions are pending that seek damages for investors who purchased IPO stocks in the secondary market.
But what do these investigations prove, beyond that some firms may have broken the law? For many, the characteristics of IPOs that most attracted public and media attention — namely, the intense competition to receive allocations of shares in “hot” or oversubscribed offerings and the extraordinary first-day price spikes when shares sometimes rose 500 percent (or even more) above their offering price during the first day of trading — also indicate that something is seriously wrong, or at least dysfunctional, within the IPO market.
Far less agreement exists, however, on what, if anything, is wrong. Some see the late 1990s era in moralistic terms as reminiscent of the period preceding the 1929 crash, when stock promoters foisted worthless securities on an unsuspecting public. Others view the same evidence as demonstrating that the IPO market is economically dysfunctional and favors the interests of financial intermediaries over those of young companies seeking to raise capital. Finally, defenders of the system maintain that the recent public outcry only repeats the familiar pattern of searching for a scapegoat whenever the stock market crashes. They argue: “If ain’t broke, don’t fix it.”
תגובה', צהר ז, תשס"א, עמ' 59
