Securities lawyers are eagerly anticipating a trove of documents Goldman Sachs and Credit Suisse First Boston are to deliver to Congress detailing how the investment banks handed out shares of sought-after initial public offerings at the height of the bull market.
They are hoping that the records will provide valuable evidence to back their contention that banks defrauded investors by manipulating IPO prices and cutting crooked deals in exchange for the best allocations.
In a best-case scenario, the documents could increase pressure on the banks to offer quick settlements in a host of suits.
“They’re going to fill the public record with all the information we need,” says Howard Sirota, a securities lawyer who is part of a class action group suing the largest banks for IPO misconduct. “It’s become a situation where Red Auerbach would light up the victory cigar.”
The documents, due on Thursday, were requested as part of the House Financial Services Committee’s ongoing investigation into the spectacular failures of WorldCom, Global Crossing and Enron.
After discovering that Salomon Smith Barney awarded Bernie Ebbers, WorldCom’s founder, with sought-after IPOs that allowed him to reap millions of dollars in quick profits, they are now trying to determine whether Wall Street used hot IPOs as a bribe to win investment banking business.
The committee has asked Goldman and CSFB to provide information on telecommunications and internet IPOs they underwrote in the past five years as they search for potential conflicts of interest.
Both banks have denied any wrong-doing, and say they are happy to turn over the documents. It is far from certain that any incriminating information will turn up.
Authorities investigated “spinning”, the awarding of IPOs as a quid pro quo in the late 1990s and failed to bring charges despite its pervasiveness.
Like insider trading, it is difficult to establish the intentions behind what appear to be suspicious transactions.
But the documents could bolster the civil cases, where the burden of proof is far less. Rather than establish their claims beyond a reasonable doubt, securities lawyers are seeking enough material so that Wall Street will settle to avoid the embarrassment and potentially crippling damages of a jury trial.
“Every time documents come out, it’s a help,” says Mel Weiss, whose firm, Milberg Weiss Bershad Hynes & Lerach, is the nation’s largest and the scourge of Wall Street.
In a complaint that consolidates more than 300 individual suits, Milberg has accused 40 investment banks of cheating investors by using crooked research analysts and bogus trading techniques to artificially pump up share prices in the many failed technology companies they underwrote.
If successful, the suit could net as much as $6bn, according to some legal researchers, making it the largest class action ever.
Milberg has launched their own vast investigation, interviewing more than 800 people, to build their case. But the firm has been constrained as it awaits the judge’s ruling on a motion by the banks to have the case dismissed.
Due to the Public Securities Litigation Reform Act, a 1995 law designed to rein in class action firms, lawyers are barred from performing discovery and requesting documents from defendants until their case is approved by the judge.
In the meantime, Congress’s investigation could supply a rich vein of material. Unlike the SEC or NASD, Congress tends to share any dirt it uncovers.
“We’re in contact with them all the time,” Mr Weiss says of the House Financial Services Committee. d3 The document requests could prove even more valuable to smaller firms that lack the resources of Milberg to mount ambitious investigations.
“In an ideal world for the plaintiffs, the government will make the case for them so that the suit requires a minimal investment,” says Tom Dewey, a partner at Dewey, Pegno & Kramarsky. “It could become a lay-up.”
Congress is not their only source of information. Eliot Spitzer, the New York attorney general, already provided a bonanza of internal emails after investigating Merrill Lynch as part of his probe into conflicts of interest on Wall Street.
Meanwhile, state securities regulators from around the country have joined Mr Spitzer. The Massachusetts regulator last week leaked a series of emails from CSFB, in which research analysts complained about the pressure exerted on them to recommend companies’ stock.
While the class action lawyers are aching to read inside information about the Goldman and CSFB IPO machines, a much bigger gift may be forthcoming: democrats on the Financial Services Committee are urging Michael Oxley, chairman, to expand the investigation throughout Wall Street.