In 1997, DTC - which provides clearance and settlement services to the securities industry - implemented a system approved by the Securities and Exchange Commission (SEC) to track sales of shares in initial public offerings. The purpose of the system was to allow underwriters to monitor the flipping of new issues. This IPO Tracking System produced IPO Tracking Reports, which identified customer accounts that had sold IPO shares within certain time periods following the allocation of shares. DTC provided IPO Tracking Reports to underwriters upon request. Underwriters used the report information in a number of ways - including determining allocations in future IPOs, and imposing penalty bids on firms whose customers sold IPO shares prior to the expiration of the tracking period.
Spear Leeds had objected to the IPO Tracking System in a comment letter to the SEC during the approval process for the system. In its comment letter, Spear Leeds raised concerns that the system would prevent anonymity in the securities market and restrict secondary market sales. The SEC rejected those concerns.
NASD found that around the time the system was implemented, some Spear Leeds customers objected to their sales of IPO shares being identified through the IPO tracking system, citing concerns about preserving the anonymity of their trading activity, and thereby preserving their ability to obtain future IPOs. In response, Spear Leeds developed and implemented a system designed to conceal sales of IPO shares from the IPO Tracking System.
NASD's disciplinary action rests on Spear Leeds' actions to conceal IPO information from market participants. "For a firm to design a system to deprive underwriters and other market participants of critical information relating to IPO allocations - information that they are entitled to - is deeply troubling, and a serious violation of the high ethical standards required of firms," said NASD Vice Chairman Mary L. Schapiro.
The tracking system required participating firms such as Spear Leeds to establish two accounts - an IPO Control Account and a Free Account. The IPO Tracking system identified the sale of IPO shares when shares were moved from the IPO Control Account to the Free Account. NASD found that to avoid detection by DTC through the tracking system, Spear Leads completed delivery on the sales of IPO shares for its customers by borrowing shares from third parties rather than moving shares from the IPO Control Account. That way, it appeared that the customers still owned their shares, and the sales were not detected and included in the IPO Tracking Report. Once the time period for tracking sales of IPO shares under the IPO Tracking system was over, Spear Leeds replaced borrowed shares by delivering shares from the IPO Control Account back to the third-party lenders.
NASD found that Spear Leeds used this system to circumvent DTC's IPO Tracking System from approximately August 1997 through January 2001. Spear Leeds never informed DTC that it had implemented this system. As a result, numerous sales of IPO shares in accounts at Spear Leeds were not reflected in reports generated by the DTC system.
NASD found that in creating and implementing this system and in failing to disclose its effects to DTC, Spear Leeds violated NASD rules by failing to act in a manner that was consistent with high standards of commercial honor.
In settling this matter, Spear Leeds neither admitted nor denied the charges, but consented to the entry of NASD's findings.
The Goldman Sachs Group acquired Spear Leeds in late 2000. In January 2005, Spear Leeds changed its name to Goldman Sachs Execution & Clearing, L.P.
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 for existing brokers or firms and requested more than 190,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (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.
("Copyright 2005 National Association of Securities Dealers, Inc.")
