U.S. Securities and Exchange Commission
Litigation Release No. 17923 / January 9, 2003
Securities and Exchange Commission v. Robertson Stephens, Inc., Civil Action No. 03 0027 (D.D.C.)
SEC Sues Robertson Stephens, Inc. for Profit Sharing in Connection with Initial Public Offerings; Robertson Stephens, Inc. Consents to Pay $28 Million
The Securities and Exchange Commission today filed a civil action against Robertson Stephens, Inc., a San Francisco-based brokerage firm and investment bank, relating to the firm's allocation of shares in Initial Public Offerings (IPOs) during 1999 and 2000. In its complaint, the Commission alleges that Robertson Stephens, which underwrote more than 75 IPOs in this period, wrongfully obtained millions of dollars from over 100 customer by allocating shares of "hot" IPOs to these customers and receiving, in return, profits - in the form of excessive commissions or markdowns - made by these customers on their IPO stock. Robertson Stephens has agreed to settle this matter.
The Commission's complaint alleges that Robertson Stephens violated NASD Conduct Rules that prohibit profit sharing in customer accounts and unjust or inequitable conduct, as well as books and records requirements of the federal securities laws. In settlement of this matter, and without admitting or denying the allegations in the complaint, Robertson Stephens has agreed to pay a total of $28 million to resolve the Commission's action and a related action brought by the NASD. The firm also has agreed to be enjoined from future violations of the NASD rules and books and records provisions described above. The $28 million payment is composed of $23 million in disgorgement of improper gains and $5 million in civil penalties.
The Commission's complaint, filed in the United States District Court for the District of Columbia, includes the following allegations:
In 1999 and 2000, Robertson Stephens allocated IPO shares to certain institutional accounts that shared their IPO profits with the firm by paying unusually large commissions on secondary trades in highly liquid, exchange-traded securities. In some instances, these accounts paid back commissions to Robertson Stephens that were over 4,000% higher than the commissions customarily paid by institutions. For example, instead of a typical commission of $.06 per share on secondary trades, these institutional accounts paid Robertson Stephens commissions ranging up to $2.50, with a small number of trades over $2.50.
There was no economic purpose for these commission generating secondary trades, which were typically executed the day before the IPO, the day of the IPO, and shortly after the IPO. Indeed, some of the accounts engaged in offsetting trades, where they purchased or sold securities through Robertson Stephens and at the same time executed the other side of the trade through another brokerage firm. Although the purchase and sale often were executed at a similar price, payment of the significant commission to Robertson Stephens resulted in a net loss to the account.
Robertson Stephens' wrongful conduct mainly involved certain hedge funds and other small institutional accounts that did not generate enough ordinary commission business under Robertson Stephens allocation practices to warrant the IPO allocations they wanted or received. Taking advantage of the high demand for IPO shares during this period, certain Robertson Stephens personnel pressured these institutional accounts to increase their business in secondary trades with Robertson Stephens in order to raise their "rank" to get IPO allocations. These accounts increased their rank and shared profits through the payment of the unusually large commissions on their secondary trades with Robertson Stephens.
Certain institutional accounts paid high commissions based on how much money they made on a particular "hot" IPO. On hot IPO days, many of these accounts would place their orders for trades on the market's opening, but would not place commissions on the trade until later in the day after the account determined how much money they made or would make by flipping the IPO. Because of the pressure they faced to increase their rank in order to obtain or increase their IPO allocations, certain institutional accounts determined a percentage of profits to repay the firm in order to maintain their rank and obtain IPO shares. Certain institutional accounts repaid the firm about 25% to 30% of their profits on successful IPO deals.
Robertson Stephens also improperly shared in the profits of some of its large retail accounts serviced by its Financial Services Department (FSD). Some FSD brokers, who had discretion in allocating IPO shares to their customers, reminded their customer accounts about IPO profits and also asked them to engage in trades in return. These retail accounts shared profits by paying unusually high commissions on other secondary trades or high markdowns when they sold their IPO shares back to Robertson Stephens.
Certain Robertson Stephens management and syndicate personnel were informed that Robertson Stephens was sharing in IPO profits. This is reflected in e-mail messages and other communications cited in the complaint.
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Robertson Stephens has consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment that: (1) permanently enjoins Robertson Stephens from violating NASD Conduct Rules 2110 (just and equitable principles of trade) and 2330 (prohibition against profit-sharing), and Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3(a)(6); (2) orders Robertson Stephens to pay disgorgement of $23 million, which would be reduced to $11.5 million in recognition of the firm's payment of $11.5 million in the related NASD proceeding; and (3) orders Robertson Stephens to pay a civil penalty of $5 million, which would be reduced to $2.5 million in recognition of Robertson Stephens' payment of a $2.5 million penalty to NASD in its related proceeding.
The Commission acknowledges the assistance of NASD in the investigation of this matter.
SEC Complaint in this matter