U.S. Attorney Launches Probe Into 'Spinning' of Hot Offerings

By Michael Siconolfi, Staff Reporter
The Wall Street Journal

April 16, 1998

The Manhattan U.S. attorney's office has launched a criminal investigation into the controversial practice of "spinning" hot new stock offerings, according to people familiar with the matter.

The broad probe, which is in its preliminary stage, marks a new phase of the scrutiny into spinning. Spinning occurs when securities firms allocate initial public stock offerings to the personal brokerage accounts of corporate or venture-capital executives -- so the shares can then be sold, or "spun," for quick profits -- in a potential bid to get future business from the executives' companies. The Securities and Exchange Commission and the National Association of Securities Dealers have been conducting separate civil inquiries into the practice since November.

The criminal investigation underscores increased efforts by Wall Street regulators and prosecutors to ramp up the potential penalties for securities-law offenders. SEC Chairman Arthur Levitt Jr. said recently that a top priority is to put bad brokers behind bars. Mr. Levitt has pushed for greater coordination between the SEC, which can file only civil cases, and the Justice Department so that serious Wall Street scofflaws or recidivists also face criminal prosecution.

Nature of Study

Criminal prosecutors are trying to determine, among other things, whether spinning by investment bankers and corporate executives constitutes bribery, the people said. Prosecutors also are examining whether executives breached their corporate duty by receiving such IPO shares in their personal brokerage accounts, the people said. Under the legal doctrine known as "corporate opportunity," executives are barred from taking personal advantage of financial opportunities that come to them by virtue of their position at the company. Rather, executives are required to offer the opportunity to their companies.

But this is an aggressive criminal theory that hasn't always succeeded. In the 1980s insider-trading cases, for instance, Thomas Spiegel, former head of Columbia Savings & Loan Association, was indicted on charges including improperly obtaining common-stock warrants from Drexel Burnham Lambert Inc. as part of Columbia's $78 million investment in a leveraged buyout. But a federal jury in California acquitted Mr. Spiegel in 1994.

"Criminalizing fiduciary-duty law is very tricky," an individual with knowledge of the spinning investigation said.

The U.S. attorney's office, as is its custom, wouldn't confirm or deny the existence of an investigation.

The heightened probe comes amid this week's $60 billion merger agreement between NationsBank Corp. and BankAmerica Corp., which includes, respectively, the banks' NationsBanc Montgomery Securities and BancAmerica Robertson Stephens securities units -- both of which were cited in a November Wall Street Journal article on spinning that triggered the regulatory investigations.

Allocation of Shares

In one instance, Robertson Stephens allocated 100,000 IPO shares of Pixar Animation Studios (producer of the film, "Toy Story") to the personal brokerage account of Joseph Cayre, chief executive of a video-game company; Mr. Cayre boasted to bankers that he turned a quick $2 million profit on the Pixar shares. Mr. Cayre's company later used Robertson Stephens for its own IPO, and on subsequent acquisitions. Both Mr. Cayre and Robertson Stephens have said they did nothing wrong. Wednesday, a BankAmerica spokeswoman declined to comment, as did a Montgomery spokeswoman, who cited the "regulatory inquiries."

But allocations don't have to be large to draw prosecutors' attention -- and potential penalties. Section 215 of the U.S. penal code says those found to have given or received improper financial incentives of more than $1,000 "in connection with any business or transaction" of an institution "shall be fined not more than $1 million or three times the value of the thing given, offered, promised, solicited, demanded, accepted or agreed to be accepted, whichever is greater, or imprisoned not more than 30 years, or both."

Edward Fleischman, a former SEC commissioner, likens spinning to "pay to play," the practice of public officials demanding contributions from securities firms competing for municipal-bond contracts handed out by the politicians. Thus, no matter what the monetary threshold is in the penal code, spinning "sure smells like whatever commercial bribery is," says Mr. Fleischman, now at the law firm of Linklaters & Paines.

Records Are Sought

As part of their separate civil inquiries, the SEC and NASD earlier this year began requesting investment-banking and brokerage records from several securities firms, including Robertson Stephens and Montgomery Securities, according to people familiar with the matter. These investigations center on potential abuses by investment banks of "discretionary" brokerage accounts, which permit brokers to freely trade for individuals on their own. Regulators are particularly interested in instances where investment banks provided an executive with an IPO share allocation, together with a quick, profitable sale, after trading of the IPO was under way.

Some firms have changed their practices. Robertson Stephens took a step against spinning by adopting a policy requiring that IPO shares be allocated based on a client's brokerage activity with the firm during the preceding 18 months. Montgomery said in November that it would have a "heightened sensitivity to ensuring that our IPO allocation procedures are consistent with the letter and spirit of the law."

Indeed, regulators have said their investigations of future spinning activity could be limited because the practice has waned in the wake of the Journal's scrutiny of the matter. "The focus on spinning has had perhaps the greatest impact" on stamping out the practice, said Richard Walker, the SEC's general counsel who recently was tapped to be the commission's new enforcement chief.

"We're looking at this thing from all points of view," Mr. Walker said of the SEC's pending investigation. "But the fact that the problem has been exposed has done more than anything we could do."

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