The mighty NASD strikes again! The NASD censured and sanctioned Bear Stearns, Morgan Stanley and Deutsche Bank for handing out hot IPO’s to their buddies and friends and subsequently overcharging them. Bear Stearns agreed to pay a $4.95 million fine, Deutsche was ordered to payout $5.29 million, and our old friend Morgan Stanley had to pay up $5.39 million. These firms violated NASD rules when they charged ridiculously high commissions from their buddies and friends.
“Now, you are probably asking yourself why would these bastions of financial integrity rip off and overcharge their friends? “
“In reality, there wasn’t any rip off, it was an old fashioned kickback!”
In each case the firm took commission payments well above their usual six cents a share, sometimes as much as $3 a share. Within the next few days “hot” IPO shares were allocated to those customers. These “hot” IPO’s were subsequently sold for enormous profits. Investment houses are not allowed to own shares of IPO’s that they are underwriting. This was their way of getting a piece.
Bear Stearns allocated 100,000 shares of Pac-West Telecomm to a customer for $10 a share. On the first day Pac-West closed at $18.44, a nice 84% return. On that same day the same customer sold 100,000 shares of Citigroup and purchased 100,000 shares of General Motors paying Bear Stearns $1 a share. They paid $188,000 more than Bear Stearns commission schedule called for. The interesting thing is the customer was glad to do it. They just made $844,000 on Pac-West, easy money!
Deutsche Bank allocated 25,000 shares of Fairmarket Inc. to one of their customers. This flash in the pan rose 185% from $17 to $48.50 on the first day. Within one day the customer paid Deutsche Bank $1 a share to execute five trades and 40 cents a share to execute five other trades. The customer paid in $737,000 more than he should have. Once again, who cares! He made $780,000 on Fairmarket Inc.
Let’s not forget our friends at Morgan Stanley. They were nice enough to give 1,000 shares of the infamous WebMethods IPO to one of their buddies at $35. On the first day of trading the shares went to $212.65, a profit of $177,625. Magically, that very same day the same customer paid a $3 a share commission for a 20,000-share trade of Tiffany & Co, $58,000 more than would normally apply.