Luv2Roam
DIS Legend
- Joined
- Jun 3, 2000
- Messages
- 15,479
Spinning: Out of control?
IPO 'gifts' from investment banks to clients will likely be banned
Tommy Perkins (Memphis Business Journal)
Like many of Wall Street's problems, this one began with the dot-com boom.
"Spinning" -- investment bankers' practice of doling out shares of hot initial public offerings to their most favored clients -- came in vogue during the Gilded Age of technology stocks, an era now under the scrutiny of regulators and trade groups.
The intended consequences of spinning were simple: As tickets to wealth at unprecedented speeds, IPO shares served as investment bankers' most effective calling cards to thank a corporate finance client for old business or to lure new business from that client.
The unintended consequences were that the practice warped the marketplaces for both technology stocks and corporate finance, while placing executives in the ethically dubious position of profiting from their positions with their companies with no benefit to their employees or shareholders.
"To put it simply, it's a kickback," says Doug Quay, chairman of law firm Glankler Brown PLLC's venture capital and private equity practice group. "The idea was that CEOs would direct the business to the investment banking firm that gave them IPO shares rather than putting the work out for competitive bidding."
Since the securities industry's trade group, the National Association of Securities Dealers, initially proposed to restrict spinning, the Securities and Exchange Commission, the NASD, the New York Attorney General's Office and the New York Stock Exchange have gone on to propose a total ban.
"This proposal has got to go to the full SEC for approval, but there's not much doubt that this is going to be approved," Quay says.
The practice started innocently enough. In any public offering, the company going public keeps a reserve set of shares for officers of the company, as well as their friends and family.
But the category of friends and family was greatly expanded in the late 1990s, says Matt Heiter, a corporate and securities lawyer with Baker, Donelson, Bearman & Caldwell PC who also served as general counsel and secretary of the publicly traded Internet Pictures Corp. from 1999-2002.
"Because underwriters control the distribution, the term friends and family was expanded to friends and family of the underwriters," he says.
Investors allege that Disney chief executive Michael D. Eisner, Ford CEO William Clay Ford Jr., and several eBay, Inc., executives, including CEO Margaret C. Whitman, received hot stocks from Goldman Sachs Group, Inc. Salomon Smith Barney, investors say, funneled IPOs to ex-Qwest Communications CEO Joseph P. Nacchio for the same reason.
Disney, Ford, and eBay say their executives have long had personal relationships with Goldman and did nothing wrong. Still, Disney and Ford have asked independent board members to investigate.
Whitman resigned from Goldman's board last month after her role with the company came under scrutiny when a congressional investigation revealed that she received shares in more than 100 Goldman-managed IPOs since 1996, re-selling many at a profit.
These latest moves spring from probes begun earlier this year by Congress and New York Attorney General Eliot Spitzer into the rich IPO grants that investment banks gave to their best clients in the booming '90s. In September, Spitzer sued five telecom execs to force them to give back some $28 million they banked from IPOs.
"It pretty much was a practice that originated with the big investment banks and that's pretty much where it stayed," says John Good, a corporate and securities lawyer with Bass, Berry & Sims PLC who represents Morgan Keegan & Co.'s investment banking practice, as well as local public companies such as National Commerce Financial Corp., Master Graphics, Inc., and Mid-America Apartment Communities. "I'm not aware of any regional firm that's been called to the carpet for that particular practice."
Small individual investors were probably not hurt directly by the practice, since few had access to IPOs. But Glankler Brown's Quay says that the small fish were still forced to swim in contaminated water.
"I think it kept shares from being available to individual investors because they were being allocated to executives and directors of companies that did business with investment banking firms," Quay says.
Additionally, while large investors and clients were given more leeway to take profits early on IPOs, less-favored investors faced punishment for selling early by being shut out of future offerings.
As part of the $1.4 billion settlement Spitzer won from the nation's top 10 investment banks, securities firms will have to afford equal treatment to investors large and small.
© 2003 American City Business Journals Inc.
IPO 'gifts' from investment banks to clients will likely be banned
Tommy Perkins (Memphis Business Journal)
Like many of Wall Street's problems, this one began with the dot-com boom.
"Spinning" -- investment bankers' practice of doling out shares of hot initial public offerings to their most favored clients -- came in vogue during the Gilded Age of technology stocks, an era now under the scrutiny of regulators and trade groups.
The intended consequences of spinning were simple: As tickets to wealth at unprecedented speeds, IPO shares served as investment bankers' most effective calling cards to thank a corporate finance client for old business or to lure new business from that client.
The unintended consequences were that the practice warped the marketplaces for both technology stocks and corporate finance, while placing executives in the ethically dubious position of profiting from their positions with their companies with no benefit to their employees or shareholders.
"To put it simply, it's a kickback," says Doug Quay, chairman of law firm Glankler Brown PLLC's venture capital and private equity practice group. "The idea was that CEOs would direct the business to the investment banking firm that gave them IPO shares rather than putting the work out for competitive bidding."
Since the securities industry's trade group, the National Association of Securities Dealers, initially proposed to restrict spinning, the Securities and Exchange Commission, the NASD, the New York Attorney General's Office and the New York Stock Exchange have gone on to propose a total ban.
"This proposal has got to go to the full SEC for approval, but there's not much doubt that this is going to be approved," Quay says.
The practice started innocently enough. In any public offering, the company going public keeps a reserve set of shares for officers of the company, as well as their friends and family.
But the category of friends and family was greatly expanded in the late 1990s, says Matt Heiter, a corporate and securities lawyer with Baker, Donelson, Bearman & Caldwell PC who also served as general counsel and secretary of the publicly traded Internet Pictures Corp. from 1999-2002.
"Because underwriters control the distribution, the term friends and family was expanded to friends and family of the underwriters," he says.
Investors allege that Disney chief executive Michael D. Eisner, Ford CEO William Clay Ford Jr., and several eBay, Inc., executives, including CEO Margaret C. Whitman, received hot stocks from Goldman Sachs Group, Inc. Salomon Smith Barney, investors say, funneled IPOs to ex-Qwest Communications CEO Joseph P. Nacchio for the same reason.
Disney, Ford, and eBay say their executives have long had personal relationships with Goldman and did nothing wrong. Still, Disney and Ford have asked independent board members to investigate.
Whitman resigned from Goldman's board last month after her role with the company came under scrutiny when a congressional investigation revealed that she received shares in more than 100 Goldman-managed IPOs since 1996, re-selling many at a profit.
These latest moves spring from probes begun earlier this year by Congress and New York Attorney General Eliot Spitzer into the rich IPO grants that investment banks gave to their best clients in the booming '90s. In September, Spitzer sued five telecom execs to force them to give back some $28 million they banked from IPOs.
"It pretty much was a practice that originated with the big investment banks and that's pretty much where it stayed," says John Good, a corporate and securities lawyer with Bass, Berry & Sims PLC who represents Morgan Keegan & Co.'s investment banking practice, as well as local public companies such as National Commerce Financial Corp., Master Graphics, Inc., and Mid-America Apartment Communities. "I'm not aware of any regional firm that's been called to the carpet for that particular practice."
Small individual investors were probably not hurt directly by the practice, since few had access to IPOs. But Glankler Brown's Quay says that the small fish were still forced to swim in contaminated water.
"I think it kept shares from being available to individual investors because they were being allocated to executives and directors of companies that did business with investment banking firms," Quay says.
Additionally, while large investors and clients were given more leeway to take profits early on IPOs, less-favored investors faced punishment for selling early by being shut out of future offerings.
As part of the $1.4 billion settlement Spitzer won from the nation's top 10 investment banks, securities firms will have to afford equal treatment to investors large and small.
© 2003 American City Business Journals Inc.
