Getting Sued For Getting Ripped Off, A Wall Street Story

from the screwed-twice dept

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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  • identicon
    Foof, 29 Nov 2005 @ 9:07pm

    No more laddering

    It it wasn't already since Sarbanes-Oxley, laddering is prohibited as of Dec 1 (tomorrow) 2005.

    reply to this | link to this | view in chronology ]

  • identicon
    Boo, 30 Nov 2005 @ 12:18am

    and the tech angle is?


    impressed with the reading and study you put in to understand the topic well enough to describe it so well in the post - but i think the post itself is a little off-topic for a tech dirt, no?

    reply to this | link to this | view in chronology ]

    • identicon
      Joe Black, 30 Nov 2005 @ 12:34am

      Re: and the tech angle is?

      The reason its tech dirt is the bubble was mainly a tech bubble.

      reply to this | link to this | view in chronology ]

    • icon
      Mike (profile), 30 Nov 2005 @ 1:12am

      Re: and the tech angle is?

      impressed with the reading and study you put in to understand the topic well enough to describe it so well in the post - but i think the post itself is a little off-topic for a tech dirt, no?

      Our focus has always been the intersection of technology and business -- and things dealing with Wall Street, IPOs, venture capital, etc. all seem to fall within that realm.

      reply to this | link to this | view in chronology ]

  • identicon
    giafly, 30 Nov 2005 @ 1:32am

    They were insured


    • "this settlement was actually negotiated between the class-action attorneys who purport to represent the shareholders and the insurance companies who insure public companies and their officers against suits like this".

    • Underwriters should chose a slightly-low price to attract some over-subscription on average and protect themselves and their client against market falls. This does not excuse the ridiculous extent of under-pricing, fraud and corruption during the Dotcom boom of course.

    reply to this | link to this | view in chronology ]

    • identicon
      Tom Evslin, 30 Nov 2005 @ 5:55am

      Re: They were insured

      Despite being insured, these suits are expensive to the companies in both money and time. The insurance policies typically have a retainage (deductible) so initial cost of defense was born by the companies.
      Moreover, each payment by the insurers seems to result in higher premiums. In the end, since the insurers are profitable, you have to assume that the expense is actually born by the companies and, of course, the shareholders whom are allegedly being represented by the class-action bar.

      reply to this | link to this | view in chronology ]


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