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SEC, Spitzer Might Outlaw Practice of 'Spinning' IPOs

Nov 5, 2002 | Wall Street Journal The market for initial public offerings cooled in 2000. But the chill for corporate executives who had been showered with IPOs from Wall Street could be permanent, Tuesday's Wall Street Journal reported.

A little-noticed effort is under way as part of a plan by the New York attorney general's office and the Securities and Exchange Commission to overhaul Wall Street stock research that would ban the questionable IPO practice of " spinning," in which securities firms steer allocations of IPOs to executives who also are investment-banking clients.

During the long stock-market boom, big Wall Street firms regularly doled out shares of hot IPOs to corporate chiefs to entice those executives to reward brokerage houses with business from their companies such as underwriting stock or bond deals or handling other lucrative corporate-financing assignments.

Now, New York Attorney General Eliot Spitzer and SEC enforcement chief Stephen Cutler are considering a range of proposals to change the IPO-allocation practices of major Wall Street firms. Among them: a new rule that would totally bar firms from distributing IPO shares to executives or directors who are in the position of directing the firms' underwriting assignments, people with knowledge of the matter say.

Full details of the plan aren't clear. And the final proposal could shift, because regulators are considering other, less-restrictive, arrangements, including heightened disclosure of IPO allocations to top executives. But what is apparent is that the IPO move would have to be agreed to as part of enforcement proceedings against roughly 10 major Wall Street firms, including Goldman Sachs Group Inc.; Morgan Stanley; Merrill Lynch & Co.; Citigroup Inc.'s Salomon Smith Barney unit; and Credit Suisse Group's Credit Suisse First Boston. And any new restriction ultimately could be enforced through a regulatory rule.

A spokesman for Mr. Spitzer's office declined to comment, as did a spokesman for the SEC and for the Securities Industry Association, a trade group for Wall Street securities firms.

Questionable IPO allocations and other practices on Wall Street and in corporate boardrooms have come to be seen as a hallmark of the stock-market bubble of the late 1990s. Now, after a grinding market downturn and a wave of corporate scandals, curtailing such practices has become part of the broad agenda for corporate overhaul. This includes efforts by Congress and regulators to address such issues as accounting overhaul and conflicts of interest by Wall Street analysts all in a bid to restore investor confidence.

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