The massive case involves 309 separate suits filed against 55 investment banks, more than 300 companies that went public between 1998 and 2000, and an unspecified number of their individual corporate officers and directors. The total number of defendants could be more than 1,000; companies involved include Global Crossing, MP3.com, Ask Jeeves Inc., and Red Hat Inc.
The proposed settlement guarantees the plaintiffs will receive at least $1 billion, to be paid by the tech companies' insurers, said Melvyn I. Weiss, chairman of a committee of attorneys representing the investors. The plaintiffs hope that settling with the companies that issued the stock--who they say knew or should have known about the alleged misconduct--will strengthen their position as they continue negotiating with the investment banks.
"We have always been of the mind that the primary target in this case is the underwriting community," Weiss said. "This gives us a huge booster shot in our case against them."
The plaintiffs are looking to recover "many billions" of dollars from the investment banks, Weiss said. The firms, including J.P. Morgan, Credit Suisse First Boston, Morgan Stanley and Smith Barney, are accused of plotting to artificially inflate the value of IPO stocks through a practice called "laddering," in which larger shares are allocated to investors who promise to take bigger stakes after the stock hits the open market.
In addition, some customers who invested in IPOs were compelled to give extra compensation to the banks, sometimes through inflated commissions on other trades. Later, after the so-called "quiet period" that follows IPOs, analysts who worked for the banks issued favorable research to fluff up the stocks, whether they were worthy or not.
As part of the settlement, the tech companies have agreed that any claims they might have against the investment banks will be assigned to the plaintiffs' class. Their cooperation may also help speed the discovery process, Weiss said.
"They participated in road shows, they had conversations with the underwriters," Weiss said. "They may have been misled as to what compensation the underwriters were receiving. ... all of this is important to us."
Most of those involved have approved the settlement, Weiss said, which also must be approved by the court.
No funds will be paid to investors until the case against the banks is resolved, however. If more than $1 billion is recovered from the banks, the tech companies' will not have to pay anything, the lawyers said. If the award is more than $5 billion, the tech companies and their insurers will be able to recover expenses.
The settlement was reached after more than a year and a half of negotiation between lawyers for the investors, the tech companies and at least 42 primary insurers. Attorneys involved agree it is among the most complicated cases in U.S. history.
"This is by far the most complex securities litigation that has ever been brought, and the settlement process is equally complex," said Jack Auspitz, a lawyer with Morrison & Forester, who represents 30 to 40 of the Internet companies.
In February, U.S. District Judge Shira A. Scheindlin decided the cases could go forward, rejecting a bid by the investment banks to dismiss the case.
Scheindlin reviewed more than 1,000 suits and found that investors had presented "a coherent scheme" in which the banks joined with Internet companies to defraud the public by hiding secret deals and analyst conflicts to artificially inflate new shares and deliver payoffs to insiders. If the allegations are true, she wrote in her 238-page ruling, "this scheme offends the very purpose of the securities laws."
The Securities and Exchange Commission and the National Association of Securities Dealers conducted an extensive investigation of Wall Street's dealings in IPOs. Regulators have recommended strict limits on several questionable practices popular during the tech boom, including laddering.
Ten of the largest investment banks agreed to change their research and IPO practices in a $1.4 billion settlement reached with regulators earlier this year.