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NASD details greed in IPO abuse, implicates CSFB Private Client Services Group

A staff reporter, 30 January 2005

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Credit Suisse First Boston has now officially settled with the National Association of Securities Dealers and the Securities and Exchange Co...

Credit Suisse First Boston has now officially settled with the National Association of Securities Dealers and the Securities and Exchange Commission over alleged IPO misallocation for $100m as was widely reported last month. This could result in changes to rules and practice across the industry for IPO allocation practice. CSFB has accepted that it will revise its policies and procedures as part of this settlement. This will include the formation of a new committee to review and oversee IPO allocation at the firm. Certain accounts will need to be live for at least 60 days before they can receive allocations such as hedge funds. Commissions paid by customers will also be reviewed at the time of the IPO. Many view it as a template for new SEC guidelines that could be drafted shortly. CSFB will pay $30m in fines as part of the settlement which will go to the SEC and the NASD regulations to be shared, and $70m in disgorgement of alleged gains from violations. It will also be charged with improperly sharing customers' profits, and failure to keep accurate records. CSFB will not be charged with securities fraud or making material mis-statements in its IPO offering documents. This may hamper the chances of success for many private class-action lawsuits that are waiting in the wings, though many of the class action lawyers disagree and state the fine is clear evidence of violation. Former and current CSFB employees are not yet off the hook and may face individual charges and suits. An investigation into laddering is continuing and this includes other Wall St firms such as Morgan Stanley and Goldman but not CSFB. NASD has released three press bulletins, all of which are shown below. The first has examples of deals CSFB did with its clients to ensure a share of profits in the allocation of hot IPOs. It also has quotes from Robert Glauber and Mary Schapiro. In addition it has examples of the allocation: profit plans that each client was assigned to and incriminating quotes by managers and employees at CSFB. NASD found that CSFB's practice violated NASD rules prohibiting member firms from sharing in the profits of client accounts. It also violated NASD rules that require member firms to disclose information which may be material to, or part of, underwriting arrangements and which may have a bearing on NASD's review of underwriting terms and arrangements. Here, CSFB failed to file information with the NASD that detailed the excessive commissions and profit sharing arrangements the firm made for the allocation of IPO shares. CSFB's profit-sharing scheme further violated NASD Rules which require brokerage firms to adhere to just and equitable principles of trade, as well as supervisory and books and records requirements. The NASD has earmarked funds from the settlement to be used for initiatives focusing on investor protection and education. These initiatives will include technology investments for enhanced surveillance and enforcement, education materials and outreach programs for investors. As part of the settlement, CSFB agreed to engage an Independent Consultant to conduct a review of the implementation of revised procedures regarding the areas of its business that were the subject of the action. In settling this matter, CSFB neither admitted nor denied NASD Regulation's allegations.

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