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By H. Bernstein - Contributing Columnist

Stock Option Trading An IPO allocation scandal leads to $15 million in fines for Bear Stearns, Deutche Bank and Morgan Stanley.Visit our AXcess News Forum and add your comments on this story. Try your hand at writing, the best story will be published on our news network. Take our business poll too!

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Financial Software Trading May 21, 2004 (AXcess News/StockPatrol) New York - Improper initial public offering (IPO) practices have landed some of Wall Street's leading firms in hot water - again. Bear, Stearns & Co. Inc., Deutsche Bank Securities, Inc. and Morgan Stanley & Co. Inc. have been censured by the NASD and will pay fines of more than $15 million because they engaged in improper IPO allocation practices. The penalties broke down like this: Bear Stearns - $4.95 million; Deutsche Bank - $5.29 million; and Morgan Stanley - $5.39 million.

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Online Stock Trading Company IPOs are considered "hot" and are in demand when investors and investment bankers anticipate that share prices will soar immediately after the offering. In the late 1990s, shares in many "hot" IPOs opened well above the offering price - referred to as a premium - and quickly skyrocketed several hundred percent.The three firms sanctioned this week violated industry standards and NASD rules by charging unusually high commissions to certain "preferred" customers on agency trades within one day of allocating shares in "hot" IPOs to those same customers. The NASD found that in late 1999 and early 2000, Bear Stearns, Deutche Bank and Morgan Stanley each acted as the lead or co-lead manager for hot IPOs that opened for trading at premiums of 50 percent or more over their public offering price. Customers who were fortunate enough to receive allocations of those IPOs stood to make significant immediate profits by selling those shares in the aftermarket.AdvertisementAs it turns out, some customers paid a heavy price for that privilege. Each of the three firms accepted very high commission payments for executing

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Forex Day Trading institutional-sized agency trades in liquid listed securities. According to the NASD, those commissions were far in excess of the typical rate of six cents per share. Within one day of accepting those exorbitant payments, each firm allocated hot IPO shares to those same customers.

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Financial In Market Here's an example of how it worked. In November 1999, Bear Stearns allocated 125,000 hot IPO shares to one of its customers. The share price increased over 84% on the first day of trading, providing the customer over $1 million in profits. On that same day, the customer sold 50,000 shares of a highly liquid listed security through Bear Stearns and paid the firm $2 per share for a total commission of $100,000 although the typical charge of six cents per share would have amounted to only $3,000.Similarly, in March 2000, Deutsche Bank allocated to a customer 25,000 shares of Fairmarket, Inc., a hot IPO that increased over 185%, from $17.00 to $48.50, on its first day of trading. Within one day of receiving these shares, this customer paid Deutsche Bank $1 per share to execute five listed agency trades and 40 cents per share for the execution of five additional listed agency trades. The customer paid the firm $800,000 for these trades - $737,000 more than a typical commission rate of six cents per share.

Stock Trading System Morgan Stanley engaged in a similar practice when it allocated 1,000 shares of a hot IPO to a customer at the offering price of $35 per share. At the close of the first day of trading, the share price had increased to $212,625, providing for profits of $177,625. On that same day, the customer paid Morgan Stanley $3 per share to execute an agency trade of 20,000 shares of a listed security. This payment was $58,800 more than would have been paid at a typical rate of six cents per share.Once again, the firms were betrayed by their own email records. The NASD found that internal emails reflected unusually high commissions on or near the days the firms allocated the IPO shares to these customers. For example, a broker at Bear Stearns noted that the customer is "paying $1 per today on [150,000 shares]. Happy with [hot IPO] allocation of 25,000." A Deutsche Bank email stated, "Dave @[BR] thanks you for the Foundry allocation. He is giving us a $1.00 commission on a hundred thousand shares this morning." A Morgan Stanley email noted, "[Customer] was very appreciative of his [hot IPO] allocation. By way of other business, he bought 90,000 shares of [liquid listed security] in the aftermarket today and paid the firm .30 per share. Many thanks for your help."

Day Trading Stock Tip In these instances, the NASD concluded, the extremely high commissions were not justified. "There was no legitimate reason to pay these firms millions of dollars more than other firms would charge to carry out routine trades," according to NASD Vice Chairman and President of Regulatory Policy and Oversight, Mary L. Schapiro. "By accepting high payments under those circumstances, these firms failed to observe the high standards of commercial honor and just and equitable principles of trade demanded by NASD rules," Ms. Schapiro stated.The NASD says that it is continuing to focus on abuses in the IPO allocation process.

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