Every few years, it seems, people need to be reminded that an IPO that has a big first day pop is not a successful IPO. It's a failure. It means that the underwriters priced the shares incorrectly, and the company going public left a lot of money on the table that should be theirs, but which went to speculators and investment bankers instead. Of course, it's those investment bankers that are often the underwriters as well, so there's (perhaps) some conflict of interest going on here. In the bubble years, Wall Street often liked to pump up first day shares by coming up with agreements with institutional buyers, promising them more initial IPO shares if they agreed to buy more on the open market after the IPO, driving up demand (and price). This practice is known as laddering, and is just one of many, many stunts pulled on Wall Street during IPOs in what is a pretty open secret. However, after the bubble burst, plenty of people were pissed off and that's an environment great for class action lawyers who jumped on it and sued just about everyone who had anything to do with an IPO during the bubble years. Obviously, there were many greedy people doing a lot of shady stuff -- but any investor who did a modicum of due diligence knew this went on. Blame should pretty much go in all directions -- it was a big game and those who knew how to play it, profited from it. However, Tom Evslin is now telling the story of one such lawsuit over the laddering issue. Evslin took his company public during the bubble and was then sued over it for laddering. However, what's pretty clear is that the companies in this lawsuit are getting shafted twice. First, they got ripped off by the underwriters for pricing their shares too low, basically taking money away from these companies -- and then in having to pay up from this lawsuit about a practice that they had nothing to do with and which actually hurt them -- all to reward (mostly) lawyers and (maybe, a little bit) investors who didn't actually do the due diligence to understand how IPOs work. What a great system.
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