Morgan Stanley, Goldman Settle SEC IPO Allegations

January 25, 2005 ( - Two prominent investment firms have each agreed to pay a $40 million fine to settle US Securities and Exchange Commission charges that they improperly pressured institutional customers to buy stocks in initial public offerings (IPOs).

The SEC said in  a news release that it had filed separate settlement papers in US District Court relating to allegations of wrongdoing during 1999 and 2000 against Morgan Stanley and Goldman, Sachs.

According to the federal securities regulators, the two firms tried to induce customers who received allocations of IPOs to also place purchase orders for additional shares in the secondary equity market in the first few days of public trading.

“The case against Morgan Stanley serves as a reminder to underwriters that soliciting customers who have no interest in owning a stock long-term to buy in the immediate aftermarket, pushing customers to buy in the aftermarket at higher prices and other attempts to induce aftermarket purchases are not permitted,” Antonia Chion, SEC associate director of the Division of Enforcement, said in the news release.

The SEC announcement charged that p rior to Morgan’s Stanley’s completion of participation in the distribution of IPO shares, the firm told certain customers that buying shares in the immediate aftermarket would help them win healthy allocations of over-subscribed, “hot” IPOs. In addition, Morgan Stanley tried to whip up solicited aftermarket interest from customers who Morgan Stanley knew had no interest in owning the stock of the IPO companies long-term, the SEC said.

Further, according to the SEC, Morgan Stanley proposed to certain customers the aftermarket price limits they should give to obtain a good IPO allocation. In some instances, the firm encouraged customers to increase the prices they had originally said they were willing to pay in the aftermarket, according to the allegations.

The allegations against Goldman Sachs are that during “restricted periods,” Goldman Sachs likewise tried to pressure customers into aftermarket purchases of IPO stock. Goldman Sachs communicated to the customers that the investment firm considered purchases in the immediate aftermarket to be significant in the determination of IPO allocations.

According to the SEC, Goldman Sachs encouraged certain customers that had expressed interest in aftermarket share purchases to bump up the prices they said that they would pay in the aftermarket. Some customers responded by expressing higher prices than they were originally willing to pay, in part, because they believed from their communications with Goldman Sachs sales representatives that this would improve their chances of receiving favorable allocations of IPO stock, the regulators alleged.