U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19051 / January 25, 2005
SECURITIES AND EXCHANGE COMMISSION V. GOLDMAN SACHS & CO, 05 CV 853 (SAS) (S.D.N.Y.)
SEC SUES GOLDMAN SACHS & CO. FOR IPO VIOLATIONS; GOLDMAN SACHS WILL PAY $40 MILLION
The Securities and Exchange Commission today charged Goldman Sachs & Co. with violating the securities law in its allocation of shares in initial public offerings (IPOs) in 1999 and 2000, by inducing or attempting to induce certain customers to purchase shares in the aftermarket. Goldman Sachs has agreed to a settlement in which it will pay a $40 million penalty and be enjoined from future violations of the applicable laws. The settlement is subject to court approval.
In connection with this matter, the Commission today filed a Complaint against Goldman Sachs in the U.S. District Court for the Southern District of New York alleging that Goldman Sachs violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by unlawfully attempting to induce, or inducing, certain customers to purchase stock in the aftermarket of certain IPOs underwritten by Goldman Sachs during 1999 and 2000. The Commission's Complaint alleges as follows:
Rule 101 of Regulation M, among other things, prohibits underwriters, during a restricted period (the five-day period preceding the determinations of IPO prices and prior to the completion of distributions of IPO shares), from directly or indirectly bidding for, purchasing, or attempting to induce any person to bid for or purchase any offered security in the aftermarket. As a prophylactic rule, Regulation M's prohibition is designed to prevent activities that could artificially influence the market for the offered security, including, for example, supporting the IPO price by creating a perception of scarcity of IPO stock or creating the perception of aftermarket demand for the stock. Regulation M may be violated with or without, among other things, any impact on the price of a security, scienter, or any agreement to buy stock in the aftermarket.
During restricted periods, Goldman Sachs attempted to induce, or induced, certain customers to make aftermarket purchases of IPO stock in violation of Rule 101 of Regulation M by engaging in the following activities:
- Goldman Sachs communicated to certain customers that Goldman Sachs considered purchases in the immediate aftermarket to be significant in the determination of IPO allocations. Goldman Sachs also informed certain customers that Goldman Sachs verified whether customers placed orders to purchase stock in the immediate aftermarket following an IPO. For instance, Goldman Sachs showed one customer an "Underwriting Aftermarket Report" that reflected, among other things, the customer's previous aftermarket purchases on IPOs underwritten by Goldman Sachs. Similarly, one customer sent an email to portfolio managers at her company relaying the information she had received from Goldman:
- Goldman Sachs encouraged certain customers that had provided "aftermarket interest" (expressions of interest in buying shares in the aftermarket) to increase the prices they said that they would pay in the aftermarket. Some customers responded by expressing higher prices than they were originally willing to pay in the immediate aftermarket, in part, because they believed from their communications with Goldman Sachs sales representatives that this would improve their chances of receiving favorable allocations of IPO stock.
- Goldman Sachs sought and/or accepted aftermarket interest from customers based solely or in relevant part on the amount of their prospective allocations. For example, a Goldman Sachs sales representative often suggested to one customer that he indicate that he would buy two to three times his allocation in the immediate aftermarket and did so on the CoSine IPO. The day before CoSine opened for trading, the sales representative sent an email to his ECM liaison informing him that the customer "will buy between 2-3x their allocation in the after market."
Goldman Sachs . . . has told me that for now, all their small techy deals will be subject to close scrutiny with regard to flippers. AMO's [aftermarket orders] will be watched for follow-thru on indicated intentions. . . .
During conversations or courses of dealing that included the preceding subjects, Goldman Sachs sales representatives asked certain customers during restricted periods whether, and at what prices and in what quantities, they intended to place orders to purchase IPO stock in the immediate aftermarket.
Through such questions and statements about aftermarket orders during restricted periods, Goldman Sachs communicated to certain customers hopeful of obtaining IPO allocations (including customers that did not have a genuine interest in long-term ownership of the stock being offered) that indications of intentions to place orders in the immediate aftermarket, and/or the aftermarket orders themselves, would increase their likelihood of receiving favorable allocations of IPO stock. As a result of Goldman Sachs's communications concerning aftermarket orders, and because some customers wanted to obtain IPO allocations that they reasonably believed they could "flip" for large profits, certain customers indicated intentions to place orders and/or placed orders to purchase IPO stock in the immediate aftermarket of certain offerings. Goldman Sachs engaged in a combination of some or all of the foregoing types of communications to certain customers in connection with the IPOs of CoSine, Marvell, and WebEx, Inc.
Goldman Sachs 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 Goldman Sachs from violating Rule 101 of Regulation M under the Exchange Act; and (2) orders a civil penalty of $40 million pursuant to Section 21(d) of the Exchange Act.
