- The Washington Times - Thursday, June 26, 2003

NEW YORK (AP) — Hundreds of companies that staged hot initial public offerings (IPOs) during the technology boom will pay $1 billion to investors under a tentative partial settlement announced yesterday, and cooperate in ongoing litigation against 55 brokerage firms accused of funneling huge payoffs to insiders through secret deals.

The massive case involves 309 separate suits filed against 55 investment banks, more than 300 companies that went public between 1998 and 2000, and an unspecified number of their individual corporate officers and directors. The total number of defendants could be more than 1,000; companies involved include Global Crossing, MP3.com, Ask Jeeves Inc. and Red Hat Inc.

The proposed settlement guarantees the plaintiffs will receive at least $1 billion, to be paid by the tech companies’ insurers, said Melvyn I. Weiss, chairman of a committee of attorneys representing the investors. The plaintiffs hope that settling with the companies that issued the stock — who they say knew or should have known about the misconduct they are accused of— will strengthen their position as they continue negotiating with the investment banks.

The plaintiffs are looking to recover “many billions” of dollars from the investment banks, Mr. Weiss said. The firms, including J.P. Morgan, Credit Suisse First Boston, Morgan Stanley and Smith Barney, are accused of plotting to artificially inflate the value of IPO stocks through a practice called “laddering,” in which larger shares are allocated to investors who promise to take bigger stakes after the stock reaches the open market.

In addition, some customers who invested in IPOs were compelled to give extra compensation to the banks, sometimes through inflated commissions on other trades. Later, after the “quiet period” that follows IPOs, analysts who worked for the banks issued favorable research to fluff up the stocks, whether they were worthy or not.

As part of the settlement, the tech companies have agreed that any claims they might have against the investment banks will be assigned to the plaintiffs’ class. Their cooperation may also help speed the discovery process, Mr. Weiss said.

Most of those involved have approved the settlement, Mr. Weiss said, which also must be approved by the court.

No funds will be paid to investors until the case against the banks is resolved, however. If more than $1 billion is recovered from the banks, the tech companies’ will not have to pay anything, the lawyers said. If the award is more than $5 billion dollars, the tech companies and their insurers will be able to recover expenses.

The settlement was reached after more than a year and a half of negotiation between lawyers for the investors, the tech companies and at least 42 primary insurers. Attorneys involved agree it is among the most complicated cases in U.S. history.

“This is by far the most complex securities litigation that has ever been brought and the settlement process is equally complex,” said Jack Auspitz, a lawyer with Morrison & Forester, who represents 30 to 40 of the Internet companies.

In February, U.S. District Judge Shira A. Scheindlin decided the cases could go forward, rejecting a bid by the investment banks to dismiss the cases.

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