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NASD censured the firms and ordered Morgan Stanley to pay a fine of $150,000 and disgorgement of more than $2.5 million in ill-gotten profits. J.P. Morgan was ordered to pay a fine $150,000 and Goldman Sachs was fined $125,000.
"NASD's rules that regulate the underwriting process, including lock-up requirements, ensure that the underwriting terms and arrangements are fair and reasonable," said NASD Vice Chairman Mary Schapiro. "Lock-up requirements may be imposed to bring underwriting compensation into compliance with NASD guidelines and to protect investors in IPOs from the potential for dilution and manipulation if underwriters were to sell large amounts of an IPO issuer's shares into the aftermarket. These firms' failure to have policies in place to ensure compliance with the rules and to minimize the opportunity for underwriters and related persons to realize a quick profit from the sale of pre-IPO shares hurt the integrity of the underwriting process and the confidence of investors."
Each of the firms, or entities or individuals affiliated with the firms, acquired the securities from issuers in private placements prior to each issuer's IPO. Each of the firms subsequently served as an underwriter of the issuer's IPO. Under NASD rules, certain of the private placement securities were deemed underwriting compensation and were restricted from sale for a period of one year from the date of the IPO. In addition, NASD rules provided that if a member firm agreed to restrict the sale of securities for an additional period of time - one or two years - additional discounts would be provided to the value assigned to the shares for purposes of determining underwriting compensation.
NASD's Corporate Financing Department, which reviews the terms of public offerings of securities underwritten by NASD members, determined that the underwriting compensation for certain of the offerings was excessive. As a result, in order to lower the amount of underwriting compensation for certain offerings so it would not be deemed excessive by NASD, Goldman Sachs represented to NASD in writing that relatives of employees would not sell certain securities for three years from the date of the IPO. J.P. Morgan represented to NASD in writing that its officers and affiliated companies would not sell certain securities for three years from the date of the IPO. J.P Morgan and Morgan Stanley also represented to NASD in writing, to obtain approval for other offerings, that affiliated entities would not sell certain securities for one year from the date of the offering. In addition, the registration statements for each of the offerings stated that the securities would not be sold for the specified periods. Despite the firms' representations and NASD rules, securities were sold prior to the expiration of the specified lock-up periods.
Entities affiliated with Morgan Stanley sold shares in two offerings, Breakaway Solutions, Inc. and AsiaInfo Holdings, Inc., prior to the expiration of the one-year lock-up period. As a result of the sale of these securities prior to the expiration of the lock-up period, Morgan Stanley received additional net profits of over $2.5 million.
Five individuals related to employees of Goldman Sachs sold shares in one offering, PlanetRx.com, Inc., prior to the expiration of the lock-up periods.
NASD's action against J.P. Morgan was taken against the firm as successor-in-interest to Hambrecht & Quist. An entity affiliated with Hambrecht & Quist, and officers of the firm, sold shares in four offerings - PlanetRx.com, coolsavings.com, Inc., Net2Phone, Inc. and Liberate Technologies - prior to the expiration of the lock-up periods.
Each of the firms violated NASD rules by failing to take reasonable steps to ensure compliance with the representations made to NASD regarding restrictions on the sale of the securities. Each of the firms also failed to establish and maintain an adequate supervisory system to ensure that securities would not be sold prior to the expiration of the lock-up periods.
Each of the firms settled the actions without admitting or denying the allegations, but consented to the entry of NASD's findings.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches and request almost 190,000 reports for existing brokers or firms. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.
