Following a 10-month investigation, which began in May 2000, NASD Regulation determined that CSFB's IPO profit sharing practice was widespread, occurring between April 1999 and June 2000. The practice affected more than 300 accounts serviced by the firm's Institutional Sales Trading Desk, its Private Client Services (PCS) Group and its PCS Technology Group. Certain senior managers and other employees of the Equity Sales and Equity Capital Markets Departments directed the practice, instructing CSFB employees to give greater allocations to those accounts who agreed to share their profits with CSFB. During one quarter alone, these inflated commissions on profit-sharing trades accounted for over 22 percent of CSFB's commission revenue.
Robert R. Glauber, Chairman and CEO of the NASD said of today's action, "The capital formation process will be well served and the investing public treated more fairly as a result of the disciplinary action announced today. Our prompt and forceful action to deal with these serious violations of ethics and NASD rules brings a rapid close to this chapter. Along with the SEC, we will continue to look at what additional measures, if any, may be necessary to ensure that the IPO allocation and distribution process is fair."
"This conduct was a blatant disregard of NASD rules and a serious breach of a firm's responsibility not to exploit its position as an underwriter," said Mary L. Schapiro, President of NASD Regulation, Inc. "CSFB's behavior undermines the integrity of the capital-raising process which is essential to the health of our economy, and shakes the faith of investors in the fairness of the markets."
Schapiro went on to say, "Given the enormous significance and complexity of this case, I am particularly pleased that we were able to work together with the SEC to reach a strong and consistent regulatory response to the conduct at issue."
The Case
As noted in the settlement, CSFB generally charged its clients 6 cents per share for executing an agency trade in a listed security of 10,000 shares or more. However, during the relevant period, CSFB allocated hot IPO shares to certain customers who, in exchange, paid the firm a portion of their IPO profits disguised as inflated brokerage commissions on transactions unrelated to the IPO. Thousands of transactions were executed with excessive commissions, including hundreds of trades with commission charges of $1 per share or more, some as high as $3.15 per share. These commissions bore no relationship to the execution of the trade and were paid solely to provide the firm with a share of client profits on hot IPOs. Over 90 percent of the excessive commission transactions executed on the day of, the day before, or the day after a CSFB-managed IPO were done by accounts that were allocated shares by CSFB in that hot IPO.
- For example, during the last quarter of 1999, over 3,000 trades were done at these excessive commission rates and hundreds of them were executed with a commission rate of $1 per share of more. Customers paid brokerage commissions of over 12 percent of the principal amount of the trade and numerous accounts provided CSFB with unlawful payments of hundreds of thousands of dollars in a single day as part of these profit sharing arrangements.
- For example, after a CSFB customer obtained an allocation of 13,500 shares in the VA Linux IPO, the customer sold two million shares of Compaq and paid CSFB $.50 a share - or $1 million - as a purported brokerage commission. The customer immediately repurchased the shares through other firms at normal commission rates of $.06 per share at a loss of $1.2 million on the Compaq sale and repurchase because of the $1 million paid to CSFB. On that same day, however, the customer sold the VA Linux IPO shares, making a one-day profit of $3.3 million.
- For example, another CSFB account paid a $650,000 commission or $.65 per share for the purchase of 1 million shares of Disney shortly after receiving allocations of IPO shares of both VA Linux and FogDog. The account immediately sold the Disney shares through other broker-dealers at an average price of $.027 per share and sustained a loss of over $680,000 taking into account the payment of $650,000 to CSFB. Though the trade was not profitable to the client, commissions paid were well above the usual rate and provided CSFB with a share of the client's IPO profits. The client made a profit of $2.35 million on the sale of its VA Linux and FogDog IPO shares.
- For example, when discussing allocations to a particular client, one senior manager wrote to another senior manager: "[Client] is on the 4 to 1 plan, which is generous. This should be really easy and painless * * * [He] simply needs to be told what we have made him vs. what he has paid us. Weekly if required. I think he is behind, i.e. 6 to 1 or 8 to 1, but I am not sure * * *"
- For example, a senior manager told another senior manager what would happen if profits in the account were not paid to CSFB: "Either [client] pays us, or he gets [expletive] nothing." The recipient responds "Agreed."
- For example, a trader in PCS-Tech communicated the following to his supervisor: "Basically, I told [client] that he was very far behind in commissions and that we expect a 65% return on all money that we make him. I said he still owes us for the LNUX deal not to mention the deals that have come since then. I then stated that he can do trades to increase his commissions but will be cut off from any syndicate in the future." The supervisor responded, "Out." The trader replied, "Done."
CSFB managers, brokers and sales traders participated in each dollar of profit paid to the firm, some directly and some indirectly. One senior manager allocated shares to his own clients who paid over $2.7 million in inflated commission charges. PCS salesmen were paid one-third of the commissions generated by each of their accounts. One PCS broker, for example, earned over $1 million from these excessive commission payments alone. PCS-Tech traders and salesmen were compensated through participation in a bonus pool funded, in part, by commissions generated by these accounts. Others in the firm, including senior managers, institutional sales traders, research sales persons and Syndicate Desk personnel were paid largely through bonuses based, in part, on commission revenue generated by these firm accounts.
NASD Regulation found that CSFB's practice violated NASD rules prohibiting member firms from sharing in the profits of client accounts. It also violated NASD rules that require member firms to disclose information which may be material to, or part of, underwriting arrangements and which may have a bearing on NASD's review of underwriting terms and arrangements. Here, CSFB failed to file information with the NASD that detailed the excessive commissions and profit sharing arrangements the firm made for the allocation of IPO shares. CSFB's profit-sharing scheme further violated NASD Rules which require brokerage firms to adhere to just and equitable principles of trade, as well as supervisory and books and records requirements.
The NASD has earmarked funds from the settlement to be used for initiatives focusing on investor protection and education. These initiatives will include technology investments for enhanced surveillance and enforcement, education materials and outreach programs for investors.
As part of the settlement, CSFB agreed to engage an Independent Consultant to conduct a review of the implementation of revised procedures regarding the areas of its business that were the subject of the action. In settling this matter, CSFB neither admitted nor denied NASD Regulation's allegations.
This case was investigated by NASD Regulation's Enforcement Department, with assistance from NASD Regulation's Corporate Finance Department. NASD Regulation also acknowledges the substantial assistance and cooperation of the SEC's Northeast Regional Office in this matter.
Investors can obtain more information about NASD Regulation as well as the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999, or by sending an e-mail through NASD Regulation's Web Site, www.nasdr.com.
The National Association of Securities Dealers, Inc. is the largest securities industry, self-regulatory organization in the United States. It is the parent organization of NASD Regulation, Inc.; the American Stock Exchange, LLC; and NASD Dispute Resolution, Inc. For more information about the NASD and its subsidiaries, please visit the following Web sites: www.nasd.com; www.nasdr.com; www.amex.com; www.nasdadr.com.
