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Kickback Charges Settled IPO Scandal Costs Morgan $6 Million

Feb 21, 2003 | San Francisco Chronicle JP Morgan paid $6 million Thursday to settle allegations that stock salesmen at its Hambrecht & Quist unit in San Francisco took kickbacks from investors who were allotted shares of hot IPOs during the stock market boom.

The National Association of Securities Dealers said the now-defunct H&Q, acquired by JP Morgan in 2000, received inflated stock-trading commissions from more than 90 customers between November 1999 and March 2000 on 12 initial public offerings managed by H&Q.

The settlement document in the case said clients paid "millions of dollars" in kickbacks to the firm, although it did not specify how much.

The tactic stemmed from the zenith of the tech stock mania of the late 1990s, when receiving an allocation of IPO shares was the equivalent of being handed free money.

Indeed, most of H&Q's IPOs during that period rose more than 60 percent on their first day of trading. One company, Net.Genesis Corp., rose 215 percent on its premiere in February 2000 nearly risk-free profit for the lucky few who got access.

But the practice violated securities rules. Investment banks are not allowed to share in the investment profit of their customers.

The payments were a boon to both the firm and its traders and brokers. According to the settlement document, some employees received 41 percent of their trading commissions in these questionable payments.

According to evidence in the case, one sales assistant said in an e-mail to a supervisor: "Can you tell I'm smiling (the customer) has done it again!

My baby's going to college!"

Another sales assistant wrote to a senior syndicate manager who was in charge of allocating stock that one particular customer had "a consistent pattern of rewarding the firm with commissions when they are given stock and I anticipate they will do the same here."

JP Morgan released a statement saying it was pleased to resolve the matter, and pointed out that no charges had been brought alleging that employees actively solicited the payments. Nancy Israel, a spokeswoman for the bank, said no employees will be disciplined.

JP Morgan is now the third bank to settle such allegations. Last year, Credit Suisse paid $100 million to settle similar allegations, and six of the firm's individuals were censured by the NASD.

In recent weeks, FleetBoston Financial paid $28 million to settle an inquiry into the same tactics at its now-defunct Robertson Stephens investment banking unit in San Francisco.

H&Q was acquired by Chase Manhattan Bank in 1998; JP Morgan inherited it when it merged with Chase in September 2000.

The customers, most often small hedge funds, paid outsize trading commissions on blocks of shares unrelated to their IPO allotments. In some cases, the customers paid commissions of $1.25 per share on trades, when the going rate was 6 cents.

Fund managers and investors were desperate to get their hands on those shares, and one way of increasing allocations was to try to move up the ladder as a revenue generator for firms. One customer, not identified by the regulatory agency, paid $685,000 in inflated commissions on two trades in exchange for receiving IPO shares that provided $2.9 million in first-day profits.

The NASD said trading records proved a pattern where H&Q was rewarded for hot stock allocations. In one case, the firm's commission revenue increased from $590,000 the day before one IPO to $2.2 million on the day of the IPO.

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