TUESDAY MAY 29 2001 US banks face huge claims over dot-coms FROM CHRIS AYRES IN NEW YORK WALL STREET banks are facing an avalanche of expensive litigation, with as many as 100 class-action lawsuits, demanding tens of billions of dollars in damages. The banks are being accused by investors of allegedly rigging the flotations of Internet companies during the dot-com boom of the late 1990s. An investigation by The Times has found that 21 separate lawsuits have already been filed against ten different banks in Manhattan federal courts.

The lawsuits allege that the flotations of Internet and technology companies including Marketwatch.com, MP3.com, DoubleClick and Ariba were rigged.

Securities litigation experts in New York estimate that at least another 60 similar lawsuits are currently being prepared.

The sheer volume of the lawsuits means that the banks are facing record legal fees.

The huge valuations of Internet companies during the 1990s are a bigger problem, however, because former shareholders are claiming billions of dollars in damages.

In the case of Ariba, a software company, $20 billion has been wiped off its stock market value since the start of the lawsuit. A class-action lawsuit, if successful, allows anyone who was affected by the share price collapse to apply for damages.

The lawsuits come amid a five-month-old investigation into the behaviour of the banks during the Internet boom by the Justice Department and the Securities and Exchange Commission (SEC).

The investigation initially focused on the activities of Frank Quattrone, the lead technology banker in Credit Suisse First Boston (CSFB), and his team. It has since been widened to take in all the big Wall Street banks.

Investigators are looking into whether bankers made money by using “kickbacks” and “laddering”, techniques that are both illegal.

Kickbacks involve clients paying abnormally large commissions, effectively bribes, in return for being allocated stock in hot new Internet companies.

Laddering occurs when bankers seek commitments from investors to buy more stock, at set prices and at set times, after the flotation has taken place. This guarantees that the shares will go up in the short term.

Idarto Tanumihardjo, a computer consultant at the University of Wisconsin- Madison, is typical of the former Internet investors suing the banks.

He claims to have bought 250 shares in Planet RX, the medical website, in the $20 range, about $4 above its October 1999 flotation price. But after hitting $36.50 on their first day of trading, Planet RX shares slid to $20, and then collapsed totheir current level of 27 cents.

The banks named in the lawsuits include Credit Suisse First Boston, Merrill Lynch, Morgan Stanley, Bear Stearns and Salomon Smith Barney.

Robert Baker, managing director of communications for CSFB, said at the weekend: “It’s very early in the litigation, and a large number of lawsuits have been filed against the big Wall Street firms.

“We believe that the lawsuits are without merit and we intend to defend them vigorously.”

All the firms involved in the SEC investigation have denied wrongdoing.

Jim Newman, editor of Securities Class Action Alert, a widely read Wall Street newsletter, said: “With these suits now pending, involving more than a dozen different companies, shareholders are likely to recoup some of their losses. The potential liability will be huge.”

http://www.thetimes.co.uk/article/0,,5-2001181106,00.html

-- Martin Thompson (mthom1927@aol.com), May 28, 2001

Answers

This is a trend well worth watching. There could be severe reprecussions on the economy if it continues.

-- JackW (jpayne@webtv.net), May 29, 2001.