Securities and Exchange Commission
LITIGATION RELEASE NO. 17327 / JANUARY 22, 2002
SECURITIES AND EXCHANGE COMMISSION V. CREDIT SUISSE FIRST BOSTON CORPORATION, , 02 CV 00090 ( RWR) (D.D.C.)
SEC SUES CSFB FOR IPO VIOLATIONS;
WASHINGTON - The Securities and Exchange Commission announced today that it settled charges against Credit Suisse First Boston Corporation ("CSFB"), a New York-based brokerage firm and investment bank, relating to the Commission's investigation of the firm's IPO allocation practices. CSFB agreed (1) to pay a total of $100 million in the Commission's action and in a related action announced today by the National Association of Securities Dealers Regulation, Inc. ("NASDR"); (2) to be enjoined by a federal court from future violations; and (3) to adopt extensive new policies and procedures. The $100 million payment is composed of $70 million in disgorgement of improper gains, and $30 million in civil penalties or fines.
In connection with this matter, the Commission today filed a Complaint against CSFB in the U.S. District Court for the District of Columbia, alleging violations of certain Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD"), and of books and records requirements under the federal securities laws. Given the nature and scale of the misconduct alleged in the Complaint, the Commission determined to seek an injunction based, in part, on violations of NASD Conduct Rules. According to the Complaint, in exchange for shares in "hot" IPOs, CSFB wrongfully extracted from certain customers a large portion of the profits that those customers made by immediately selling ("flipping") their IPO stock. The profits were channeled to CSFB in the form of excessive brokerage commissions generated by the customers in unrelated securities trades that the customers effected solely to share the IPO profits with CSFB.
The Commission's Complaint alleges as follows:
From at least April 1999 through June 2000, CSFB employees allocated shares of IPOs to over 100 customers who were willing to funnel between 33 and 65 percent of their IPO profits to CSFB. The profits were channeled to CSFB in the form of excessive brokerage commissions generated by the customers in unrelated securities trades that the customers effected solely to satisfy CSFB's demands for a share of the IPO profits.
The profit-sharing activity was pervasive in certain customer accounts serviced by CSFB's Institutional Sales Trading Desk, Private Client Services ("PCS") Group and Technology PCS Group ("Tech PCS"). Generally, these customers received no more than 10 percent of the IPO stock that CSFB allocated as lead managing underwriter during the relevant time period. Nonetheless, IPO trading was so profitable during this period that the relevant customers funneled tens of millions of dollars in profits to CSFB through improper commission payments.
Employees of CSFB's Equity Capital Markets, PCS, and Tech PCS divisions informed the relevant customers, both implicitly and explicitly, that they were expected to pay a portion of profits earned on their IPO flipping to CSFB in order to continue to receive allocations in "hot" IPOs. Customers who refused to funnel a portion of their profits to CSFB received smaller allocations, and in some instances were denied allocations altogether.
To maximize commission payments to CSFB, the relevant customers paid excessive commissions on off-setting trades in large capitalization, highly liquid, exchange-listed securities otherwise unrelated to the IPOs. CSFB employees sometimes assisted certain of the customers in effecting these off-setting trades. The sole purpose of this trading activity was to generate commissions for CSFB. Customers frequently executed one side of the trade with CSFB (e.g., a purchase at a commission as high as $3.15 per share) and then virtually simultaneously executed the off-setting side of the trade through another broker-dealer (e.g., a sale of the same quantity of the same stock) at the standard commission of $.06 per share.
Each of the CSFB business units that participated in the IPO allocation process engaged in explicit and implicit policies and practices to obtain improper payments from certain customers in exchange for allocations in hot IPOs. Participation in this conduct extended to senior levels of these business units and was widespread within the relevant business units. Senior executives in managerial and supervisory roles knew of the practices described in the Complaint, encouraged many of the practices described in the Complaint, directed CSFB employees to urge customers to maintain specified ratios of commissions to IPO profits, and, in some instances, personally engaged in some of the practices described in the Complaint.
The practices described in the Complaint were not isolated occurrences. Rather, these practices were a fundamental part of the manner in which CSFB dealt with a small but significant portion of its customer base. The prevalence of these practices is reflected in numerous e-mail messages and other communications, several of which are cited in the Complaint.
CSFB has agreed to settle the Commission's action and has consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment that: (1) permanently enjoins CSFB, directly or indirectly, from certain violations of NASD Conduct Rules 2110 and 2330 and Section 17(a)(1) of the Exchange Act, 15 U.S.C. § 78q, and Rule 17a-3, 17 C.F.R § 240.17a-3, thereunder; (2) orders disgorgement of $70 million, which would be reduced to $35 million in recognition of CSFB's anticipated payment of $35 million in disgorgement to NASDR in a related NASDR proceeding against CSFB; (3) orders a civil penalty of $30 million pursuant to Section 21(d) of the Exchange Act, which would be reduced to $15 million in recognition of CSFB's payment of a $15 million penalty to NASDR in the related NASDR proceeding against CSFB; and (4) orders CSFB to comply with certain undertakings discussed below.
As part of the settlement, CSFB has undertaken to establish a broad range of new policies and procedures relating to IPO allocations to prevent a recurrence of the misconduct described in the Complaint. Among the undertakings to which CSFB has consented, the firm will implement extensive new policies and procedures relating to the allocation of IPO shares, the account opening process, commission levels, and supervisory practices. The new policies include a prohibition against the following conduct: (1) making a wrongful arrangement or a wrongful quid pro quo of any kind with customers in exchange for IPO allocations; and (2) improper sharing of profits or losses with a customer who receives an IPO allocation or allocations. CSFB also has agreed to retain an Independent Consultant to conduct a review to provide reasonable assurance of the implementation and effectiveness of its new policies and procedures. This review will begin one year after the date of the entry of the Final Judgment.
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The Commission acknowledges the invaluable assistance of the United States Attorney's Office for the Southern District of New York and NASDR in the investigation of this matter.