WASHINGTON, Jan. 22 /PRNewswire/ -- NASD Regulation, Inc., announced today
that it censured Credit Suisse First Boston Corporation (CSFB) and directed it
to pay $50 million in monetary sanctions for taking millions of dollars from
customers in inflated commissions in exchange for allocations of "hot" Initial
Public Offerings (IPOs). The inflated commissions essentially amounted to a
"profit sharing" arrangement with CSFB as the IPO shares climbed in the
secondary market. As part of the settlement, CSFB will also pay $50 million
to the Securities and Exchange Commission.
Following a 10-month investigation, which began in May 2000, NASD
Regulation determined that CSFB's IPO profit sharing practice was widespread,
occurring between April 1999 and June 2000. The practice affected more than
300 accounts serviced by the firm's Institutional Sales Trading Desk, its
Private Client Services (PCS) Group and its PCS Technology Group. Certain
senior managers and other employees of the Equity Sales and Equity Capital
Markets Departments directed the practice, instructing CSFB employees to give
greater allocations to those accounts who agreed to share their profits with
CSFB. During one quarter alone, these inflated commissions on profit-sharing
trades accounted for over 22 percent of CSFB's commission revenue.
Robert R. Glauber, Chairman and CEO of the NASD said of today's action,
"The capital formation process will be well served and the investing public
treated more fairly as a result of the disciplinary action announced today.
Our prompt and forceful action to deal with these serious violations of ethics
and NASD rules brings a rapid close to this chapter. Along with the SEC, we
will continue to look at what additional measures, if any, may be necessary to
ensure that the IPO allocation and distribution process is fair."
"This conduct was a blatant disregard of NASD rules and a serious breach
of a firm's responsibility not to exploit its position as an underwriter,"
said Mary L. Schapiro, President of NASD Regulation, Inc. "CSFB's behavior
undermines the integrity of the capital-raising process which is essential to
the health of our economy, and shakes the faith of investors in the fairness
of the markets."
Schapiro went on to say, "Given the enormous significance and complexity
of this case, I am particularly pleased that we were able to work together
with the SEC to reach a strong and consistent regulatory response to the
conduct at issue."
As noted in the settlement, CSFB generally charged its clients 6 cents per
share for executing an agency trade in a listed security of 10,000 shares or
more. However, during the relevant period, CSFB allocated hot IPO shares to
certain customers who, in exchange, paid the firm a portion of their IPO
profits disguised as inflated brokerage commissions on transactions unrelated
to the IPO. Thousands of transactions were executed with excessive
commissions, including hundreds of trades with commission charges of $1 per
share or more, some as high as $3.15 per share. These commissions bore no
relationship to the execution of the trade and were paid solely to provide the
firm with a share of client profits on hot IPOs. Over 90 percent of the
excessive commission transactions executed on the day of, the day before, or
the day after a CSFB-managed IPO were done by accounts that were allocated
shares by CSFB in that hot IPO.
* For example, during the last quarter of 1999, over 3,000 trades were
done at these excessive commission rates and hundreds of them were
executed with a commission rate of $1 per share of more. Customers paid
brokerage commissions of over 12 percent of the principal amount of the
trade and numerous accounts provided CSFB with unlawful payments of
hundreds of thousands of dollars in a single day as part of these profit
* For example, after a CSFB customer obtained an allocation of 13,500
shares in the VA Linux IPO, the customer sold two million shares of
Compaq and paid CSFB $.50 a share -- or $1 million -- as a purported
brokerage commission. The customer immediately repurchased the shares
through other firms at normal commission rates of $.06 per share at a
loss of $1.2 million on the Compaq sale and repurchase because of the $1
million paid to CSFB. On that same day, however, the customer sold the
VA Linux IPO shares, making a one-day profit of $3.3 million.
* For example, another CSFB account paid a $650,000 commission or $.65 per
share for the purchase of 1 million shares of Disney shortly after
receiving allocations of IPO shares of both VA Linux and FogDog. The
account immediately sold the Disney shares through other broker-dealers
at an average price of $.027 per share and sustained a loss of over
$680,000 taking into account the payment of $650,000 to CSFB. Though
the trade was not profitable to the client, commissions paid were well
above the usual rate and provided CSFB with a share of the client's IPO
profits. The client made a profit of $2.35 million on the sale of its
VA Linux and FogDog IPO shares.
NASD Regulation found that CSFB established and maintained specific ratios
to which the firm expected certain customers to adhere. For example, accounts
on a 3:1 ratio were expected to pay one-third of their profits on IPOs to CSFB
in the form of commissions on secondary trades. Customers that shared their
profits with CSFB would be allocated shares in upcoming IPOs. Those that
refused would not receive additional IPO share allocations or would receive
smaller allocations. The ratios changed over time, and were different for
different customers. In PCS-Tech, located in the firm's California office,
CSFB initially required hedge fund accounts to pay the firm 50 percent of
profits, later increased to 65 percent. In virtually all events, CSFB
expected that these customers would, at a minimum, return one-quarter of IPO
profits in commissions on secondary trading.
* For example, when discussing allocations to a particular client, one
senior manager wrote to another senior manager:
"(Client) is on the 4 to 1 plan, which is generous. This should be
really easy and painless * * * (He) simply needs to be told what we have
made him vs. what he has paid us. Weekly if required. I think he is
behind, i.e. 6 to 1 or 8 to 1, but I am not sure * * *"
* For example, a senior manager told another senior manager what would
happen if profits in the account were not paid to CSFB:
"Either (client) pays us, or he gets (expletive) nothing." The
recipient responds "Agreed."
* For example, a trader in PCS-Tech communicated the following to his
"Basically, I told (client) that he was very far behind in commissions
and that we expect a 65% return on all money that we make him. I said
he still owes us for the LNUX deal not to mention the deals that have
come since then. I then stated that he can do trades to increase his
commissions but will be cut off from any syndicate in the future." The
supervisor responded, "Out." The trader replied, "Done."
CSFB created and maintained several reports that were used to record and
track the sharing of client profits with the firm. These included the New
Issue Performance Report, that detailed the amount the client would have made
on each IPO allocation if sold on certain dates. PCS-Tech maintained
spreadsheets that detailed specific profits made by each account and the
percentage of such profits paid to the CSFB. PCS-Tech also maintained a
report entitled the Institutional Account Profit Comparison that compared
accounts' monthly profits to secondary commissions paid and calculated a year
to date percentage.
CSFB managers, brokers and sales traders participated in each dollar of
profit paid to the firm, some directly and some indirectly. One senior
manager allocated shares to his own clients who paid over $2.7 million in
inflated commission charges. PCS salesmen were paid one-third of the
commissions generated by each of their accounts. One PCS broker, for example,
earned over $1 million from these excessive commission payments alone. PCS-
Tech traders and salesmen were compensated through participation in a bonus
pool funded, in part, by commissions generated by these accounts. Others in
the firm, including senior managers, institutional sales traders, research
sales persons and Syndicate Desk personnel were paid largely through bonuses
based, in part, on commission revenue generated by these firm accounts.
NASD Regulation found that CSFB's practice violated NASD rules prohibiting
member firms from sharing in the profits of client accounts. It also violated
NASD rules that require member firms to disclose information which may be
material to, or part of, underwriting arrangements and which may have a
bearing on NASD's review of underwriting terms and arrangements. Here, CSFB
failed to file information with the NASD that detailed the excessive
commissions and profit sharing arrangements the firm made for the allocation
of IPO shares. CSFB's profit-sharing scheme further violated NASD Rules which
require brokerage firms to adhere to just and equitable principles of trade,
as well as supervisory and books and records requirements.
The NASD has earmarked funds from the settlement to be used for
initiatives focusing on investor protection and education. These initiatives
will include technology investments for enhanced surveillance and enforcement,
education materials and outreach programs for investors.
As part of the settlement, CSFB agreed to engage an Independent Consultant
to conduct a review of the implementation of revised procedures regarding the
areas of its business that were the subject of the action. In settling this
matter, CSFB neither admitted nor denied NASD Regulation's allegations.
This case was investigated by NASD Regulation's Enforcement Department,
with assistance from NASD Regulation's Corporate Finance Department. NASD
Regulation also acknowledges the substantial assistance and cooperation of the
SEC's Northeast Regional Office in this matter.
Investors can obtain more information about NASD Regulation as well as the
disciplinary record of any NASD-registered broker or brokerage firm by calling
(800) 289-9999, or by sending an e-mail through NASD Regulation's Web Site,
The National Association of Securities Dealers, Inc. is the largest
securities industry, self-regulatory organization in the United States. It is
the parent organization of NASD Regulation, Inc.; the American Stock Exchange,
LLC; and NASD Dispute Resolution, Inc. For more information about the NASD
and its subsidiaries, please visit the following Web sites:
http://www.nasd.com ; http://www.nasdr.com ; http://www.amex.com ;
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SOURCE NASD Regulation, Inc.