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July 31, 2002

Laddering Lawsuits Break Record

By Colleen Marie O'Connor

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  • Laddering Lawsuits Break Record

Taking a company public used to mean big profits and happy clients.

But the bear market has soured many investors. Besides that, there are also allegations of unfair practices in the allocations of IPO shares.

The outcome of these charges of "laddering" - contained in a massive number of lawsuits which have raised alarm bells on Wall Street - may rest largely on one single case tried in a New York City federal courtroom.

Initial public offering "laddering" charges were the most utilized claim filed against brokers and dealers in 2001, according to PricewaterhouseCoopers (PWC), which publishes the annual Securities Litigation Study.

IPO Slowdown

A record 483 securities litigation cases were filed in 2001, compared to about 200 in 2000. All told, 308, or 54 percent of those complaints in 2001, cited laddering charges, according to PWC. Still, lawsuits with laddering charges were out of favor early this year, possibly as a result of the slowdown in the IPO market.

Laddering refers to the practice of brokers allocating shares of hard-to-come-by IPOs to favored clients. Clients only receive the IPO allocations if they agree to purchase more shares at a particular price in the aftermarket. Such tampering illegally inflates the market for these new stocks, since the average investor is unwittingly stuck paying higher prices because of this clandestine style of activity, legal experts say.

The sheer number of laddering cases filed in 2001 is what raises eyebrows.

"It's highly unusual to have so many litigations arising out of what could be best described as very similar conduct in each of them," said Geoffrey Heineman, a securities litigation partner at Ohrenstein & Brown in New York. "However, I think the issues are not that unique. I think the only issue is the volume [of cases]."

The numbers do pose a tough question. Since issuer balance sheets unraveled last year and companies restated their earnings in record numbers - seemingly good cause for investor lawsuits - why have investors shown such an appetite instead for laddering charges? Why did more investors not sue for alleged analyst misdeeds, or accounting fraud?

For some, laddering has become a symbol of Wall Street's overall misdeeds during the tech market boom of the late 1990s.

Laddering is at the heart of allegations of dubious, "industry-wide practices that provide a good part of the explanation for the so-called high tech bubble," said attorney Melvyn Weiss of Milberg Weiss Bershad Hynes & Lerach.

The Caseload

Weiss's firm was selected to head a six-firm executive committee of plaintiffs' counsel. The plaintiffs' counsel all have had lawsuits pending in the New York City federal court of Judge Shira Scheindlin. The judge's caseload involves a slew of securities firms and 263 companies.

John Sylvia, a Boston-based securities litigator, has had several clients tied up in the laddering case before Judge Scheindlin. He believes some of the attention has been created because the plaintiffs have aggregated the cases, and, therefore, raised the stakes.

Misplaced Guilt?

Another issue is whether the 2001 boom in laddering-related lawsuits happened because it is much harder to file more traditional securities fraud lawsuits. The figure for the number of non-laddering cases last year was very low by historical standards.