A federal judge granted preliminary approval on Wednesday to a $1 billion settlement between 298 companies that issued initial public stock offerings during the internet bubble and thousands of investors who cliam they were victims of fraud.
The agreement, reached in June 2003, shifts focus on the investbanks. Investors legal claims against them are still pending.
Plaintiffs (the “Investors”) allege that the companies (the “Issuers”) conspired with 55 investment banks (the “Underwriters”) to fraudulently inflate the share prices of their stocks during and after their IPOs through an elaborate scheme characterized by tie-in agreements, undisclosed compensation and analyst conflicts. They also contend that the Underwriters required substantial investors seeking allocations in the IPOs to participate in the scheme.
Investors allege that the value of their holdings plummeted when this artificial inflation dissipated.
Under the agreement, the defendant companies guarantee the investors at least one billion dollars. Specifically, the companies agree to pay plaintiffs the amount of one billion dollars less the total of all of plaintiff’s recoveries from the Underwriters.
Investors will not get any payments until the securities lawsuits against the brokerage firms, including Goldman Sachs, Morgan Stanley, Credit Suisse First Boston, are resolved.
Underwriters object to the settlement because they believe it encourages “collusion” between plaintiffs and the Issuers that would “distort the fact-finding process” and preclude a fair determination of their percentage of responsibility for any damages awarded in any IPO trial, according to court papers. In addition, they argue that the “sliding-scale nature” of the billion-dollar guarantee would provide an improper incentive for the Issuers to implicate the Underwriters while reducing the Issuers’ exposure.
But Judge Shira A. Scheindlin, said in a 52-page opinion that the Underwriters agrument lacks merit.
The “improper” financial motive decried by the Underwriters is always present in a multi-defendant case, and the Issuers would have an incentive to implicate the Underwriters regardless of whether the proposed settlement is approved,” wrote Scheindlin. “It is a common practice for defendants to point the finger at each other and to minimize their own misconduct.”.
(via United States District Court, Southern District of New York)
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