Richard A. Levan & Associates, PC - Hew York Law Journal

Thursday, Decemeber 28th, 2000

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Corporate Update

Levitt's Exit May Slow SEC Probe into IPO Allocations

BY SHANON D. MURRAY

THE SECURITIES and Exchange Commission's probe of brokerage firms' IPO allocations may lose steam now that the agency's activist chairman, Arthur Levitt, plans to retire by February, securities lawyers said this week.

The agency, along with the U.S. Attorney's Office in Manhattan, this month began investigating whether some investors paid larger-than-usual stock-trading commissions in exchange for IPO share allocations.

To that end, Bear, Stearns & Co., Credit Suisse First Boston, Goldman, Sachs & Co. and Morgan Stanley Dean Witter & Co. were subpoenaed for information, according to published reports.

In an interview with The Daily Deal, Mr. Levitt insisted the probe would not stall without him. "It is safe to assume that whatever investigation the SEC began will continue. It has nothing to do with a change in management," Mr. Levitt said.

But several securities lawyers said the probe could get lost in the shuffle as President-elect George W. Bush moves to place his stamp on the SEC's leadership.

Mr. Bush has the option of appointing a chairman to take over upon Mr. Levitt's retirement, or keeping the position open until he makes his permanent appointment, which the U.S. Senate must confirm.

"Historically, Republicans have portrayed themselves as pro-business, which suggests that cutting edge or novel enforcement theories-such as this IPO investigation- would go by the wayside," said Richard A. Levan, a partner at Drinker Biddle & Reath LLP in Philadelphia.

Bill Singer, a securities lawyer with Singer Frumento LLP, suggested that the SEC and Mr. Levitt considered that they would run out of time, but still opted to pursue the probe.

"[Mr.] Levitt saw that [Vice President Al] Gore was out and [President-elect] Bush was in and he wanted to get off a few shots to remind everybody who's in charge," Mr. Singer said.

"Every time there is an election, there is a bubbling up of cases, and they just die a tortured death," he said.

Andrew Geist, a former senior associate regional director for the SEC, said he expects the investigation will proceed, regardless of who the new chairman is.

"The commission is strongly apolitical," said Mr. Geist, who supervised the SEC's enforcement program in the New York office before leaving in April. He is currently a partner at O'Melveny &. Myers LLP in New York.

"There is a theoretical situation in which a new chairman could advise the enforcement staff that [the commission] wouldn't support an enforcement action in a particular case or a particular area, but I would view that as an extremely unlikely scenario," Mr. Geist said.

The U.S. Attorney is investigating possible criminal securities fraud, while the SEC probe could result in charges of civil violations of securities laws. Securities attorneys say the massive effort is not likely to reach the criminal threshold.

Inflated Commissions

At issue is whether brokerage houses, serving as IPO underwriters, violated securities laws by charging some investors larger-than-usual stock-trading commissions in exchange for the right to participate in hot IPOs, and whether the higher commissions paid by the clients-typically hedge funds and institutional investors- constituted illegal kickbacks.

Federal authorities are examining whether certain investors paid commissions as high as 50 cents to $ 1 a share in exchange for the IPO shares, The Wall Street Journal reported. The typical institutional rate is 5 cents.

It is a well-established industry practice for brokerage firms to consider prior loyalty in IPO allocations, Mr. Singer said. "If you buy box seats [at a stadium], you have the opportunity to buy playoff tickets. If not, good luck waiting in line."

"Is it unfair? Probably. Is unfair illegal? Probably not," he said.

While the IPO investigation may be novel, it is not baseless, Mr. Levan said.

To the extent that the SEC establishes there were actual agreements or practices of charging excessive commissions or markups, the activities by the brokerage houses may well violate several provisions of the federal securities laws, as well as the rules of the National Association of Securities Dealers and various stock exchanges, he said.

"These would be tough cases, but I certainly don't think they would be impossible cases" to prove as securities violations, Mr. Levan said.

"But it would be hard to shoehorn into securities fraud," he added.