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J.P. Morgan to Pay $25 Million to Settle SEC IPO Charges

Oct 1, 2003 | Wall Street Journal

J.P. Morgan Securities Inc. agreed Wednesday to pay $25 million to settle Securities and Exchange Commission allegations the firm violated initial public offering rules.

According to the agency, the unit of J.P. Morgan Chase violated securities regulations by inducing customers who received IPO shares to place orders for additional shares once trading began.

The company neither admitted to nor denied the allegations made in a civil lawsuit by the SEC. The big Wall Street firm also agreed to refrain from further violations in the settlement, which is subject to approval by a federal court in Washington.

The violations of securities laws and brokerage-industry rules allegedly occurred in 1999 and 2000, during the height of the tech-stock boom and the frenzy of initial public offerings of stock, known as IPOs.

J.P. Morgan also allegedly violated National Association of Securities Dealers rules that require firms to allocate IPOs in an equitable manner. The firm persuaded one or more customers in 1999 to take shares in a "cold" IPO by promising the reward of an oversubscribed IPO in the future, the SEC said.

J.P. Morgan induced some institutional customers that had received IPO stock from the firm to purchase more shares during the new issue's first few public trading days, the SEC said.

The rules against such conduct are designed to prevent the artificial pumping up of stock prices through purchases that are induced.

"This case is yet another example of the commission's resolve to vigorously enforce those rules designed to ensure that the IPO allocation process and IPO market are fair to all investors," said SEC enforcement director Stephen Cutler.

He said the case stands as a warning to all firms such as J.P. Morgan that finance issues of stock that " they cannot engage in conduct that could distort the market for IPO stocks."

The SEC suit didn't name any individuals at J.P. Morgan.

It was the second major enforcement action against the firm involving IPOs. In February, J.P. Morgan agreed to pay $6 million to settle allegations that its Hambrecht & Quist investment bank got inflated commissions from customers who improperly received IPOs. The firm, which also was censured, neither admitted to nor denied the allegations by the National Association of Securities Dealers.

The violations by Hambrecht & Quist allegedly occurred from November 1999 to March 2000, before J.P. Morgan acquired the San Francisco firm.

In a similar case in January, FleetBoston Financial Corp. agreed to pay $28 million to settle the NASD's allegations that its Robertson Stephens investment bank got inflated commissions in exchange for improperly distributing IPOs to customers.

And last year, Wall Street firm Credit Suisse First Boston agreed to pay $100 million to resolve regulators' allegations of abuses in its distribution of IPOs. Former CSFB technology banker Frank Quattrone is currently standing trial on obstruction and witness-tampering charges related to the IPO case.

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