U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18385 / October 1, 2003
SECURITIES AND EXCHANGE COMMISSION v. J.P. MORGAN SECURITIES INC. Civil Action No. 1:03 CV 02028 (ESH) (D.D.C.)
SEC SUES J.P. MORGAN SECURITIES INC. FOR UNLAWFUL
IPO ALLOCATION PRACTICES;
J.P. MORGAN AGREES TO SETTLEMENT CALLING FOR
INJUNCTION AND PAYMENT OF $25 MILLION PENALTY
The Securities and Exchange Commission ("Commission") announced the filing of a settled civil injunctive action in federal court against J.P. Morgan Securities Inc. ("J.P. Morgan"), a subsidiary of J.P. Morgan Chase & Co., relating to the firm's allocation of stock to institutional customers in initial public offerings ("IPOs") it underwrote during 1999 and 2000. In settlement of this matter, J.P. Morgan has consented, without admitting or denying the allegations of the complaint, to a final judgment that would permanently enjoin J.P. Morgan from violating Rule 101 of the Commission's Regulation M and NASD Conduct Rule 2110, and order it to pay a $25 million civil penalty. The settlement terms are subject to approval by the court.
In its complaint, the Commission alleges that J.P. Morgan violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by attempting to induce certain customers who received allocations of IPOs to place purchase orders for additional shares in the aftermarket. The complaint further alleges that J.P. Morgan did in fact induce certain customers to place such orders and such customers often purchased stock during the new issues' first few trading days.
The Commission's complaint also alleges that, in another instance, J.P. Morgan violated NASD Conduct Rule 2110, which requires member firms to observe just and equitable principles of trade, by persuading one or more customers in July 1999, to accept an allocation of a "cold" IPO (i.e., one where there is little interest in IPO shares) by promising the reward of an allocation of an upcoming oversubscribed IPO.
The Commission's complaint, filed in the United States District Court for the District of Columbia, includes the following allegations:
Rule 101 of Regulation M, among other things, prohibits underwriters, during a restricted period prior to the completion of their participation in the distribution 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 is designed to prohibit activities that could artificially influence the market for the offered security, including for example, supporting the IPO price by creating the perception of scarcity of IPO stock or creating the perception of aftermarket demand.
During the restricted period, i.e., prior to J.P. Morgan's completion of participation in the distribution of IPO shares, J.P. Morgan attempted to induce certain customers to make aftermarket purchases in violation of Rule 101 of Regulation M by engaging in the following activities:
- J.P. Morgan solicited customers to provide information about whether and at what price and in what quantity they intended to place aftermarket orders for IPO stock.
- J.P. Morgan communicated to certain customers that expressing an interest in buying shares in the aftermarket and/or aftermarket buying (providing "aftermarket interest") would help them obtain allocations of hot and oversubscribed IPOs. For example, in the Large Scale Biology IPO, a sales representative reported in an e-mail that she "was very aggressive in pushing [the customer] for aftermarket action - stressing how important it was going to be for the process."
- J.P. Morgan encouraged certain customers that had provided aftermarket interest to increase the prices they had told J.P. Morgan they were willing to pay in the aftermarket typically because other customers seeking allocations had provided aftermarket interest at higher price limits. For example, a sales representative told a customer that its aftermarket price limit was "sort of out of the game" and there was "interest at much higher levels." In the Dyax IPO, a sales representative told the syndicate desk in an e-mail, "If [the customer] gets 50,000 [IPO shares], he will buy 50,000 more (up to $16). If need be, I will tell him to increase his aftermarket price sensitivity to a higher number."
- J.P. Morgan solicited aftermarket interest from certain customers who J.P. Morgan knew had no interest in owning stock of the IPO companies long term. J.P. Morgan knew that some of these customers usually or always flipped (immediately sold) their IPO allocations. Nevertheless, J.P. Morgan expected these customers to follow through and buy in the aftermarket when they provided aftermarket interest. A number of these customers bought in the aftermarket and then sold their allocation or closed out their entire position within days of the IPOs.
- J.P. Morgan accepted, and in at least one instance sought, aftermarket interest from certain customers who said they intended to purchase an amount of shares in the aftermarket equal to the size of their IPO allocation ("1 for 1") or intended to purchase specific amounts of shares in the aftermarket that were pegged to different allocation amounts without any reference to a fixed total position size. Some customers who gave this type of aftermarket interest received large allocations even though this aftermarket interest did not provide information as to a customer's desired position size or whether a customer intended to be a long-term holder.
- After the restricted period, J.P. Morgan solicited aftermarket orders by making follow-up calls to customers who had previously indicated aftermarket interest. Further, J.P. Morgan often tracked whether customers followed through on their aftermarket interest and actually purchased in the aftermarket.
- When customers did not follow through, J.P. Morgan encouraged its sales force to place follow-up calls to these customers to solicit orders to purchase stock. For instance, on Aug. 6, 1999, the day after the Interactive Pictures Corp. ("IPIX") IPO started trading, the head of Global Equity Capital Markets sent an e-mail to regional sales managers and the head of syndicate, which included the following comments: (1) one customer "owe[s] it to us to be in buying the stock today"; (2) "we should push [another customer] today and if they don't show up, keep them out of these tiers going forward"; and (3) "let's make [another customer] show up today."
- In addition, in a number of instances, J.P. Morgan described certain customers' aftermarket interest as promises, obligations and commitments. For example, in an e-mail about the Genentech IPO, a sales representative said that an institutional customer "followed up in the aftermarket exactly as promised (every share through us)."
In addition to its violations of Rule 101 of Regulation M, J.P. Morgan violated NASD Conduct Rule 2110 by persuading one or more customers in July 1999, to accept an allocation of Biopure, a "cold" IPO, by promising the reward of an allocation of IPIX, an upcoming oversubscribed IPO. J.P. Morgan had difficulties in generating sufficient interest for the Biopure IPO and therefore reduced the number of shares being offered, reduced the proposed price range and delayed the final pricing of the IPO. On the evening of July 29, 1999, when the Biopure IPO was ultimately priced, but before J.P. Morgan told customers what their Biopure allocations would be, the head of syndicate noted in an e-mail: "IPIX allocations (very strong deal) will be heavily weighted toward those investors that participated in the Biopure offering . . . Given that we have fully allocated all accounts in the Biopure deal . . . it is extremely important that your investors take these allocations. I want to reiterate that we will provide you with the means to reward these clients."
SEC Complaint in this matter