Computers: 2001

CSFB sued by IPO client

Former Mortgage.com sues CSFB alleging underwriter got IPO kickbacks

New York, June 5, 2001: 5:40 p.m. ET (CNNfn) - An IPO client of Credit Suisse First Boston has sued the banking unit alleging the underwriter received illegally high banking fees, legal documents reveal.

Late last month, MDCM Holdings Inc., the surviving entity of the formerly known Mortgage.com Inc., filed a lawsuit against CSFB in the U.S. District Court for the Southern District of Florida.

MDCM alleges that CSFB obtained "kickbacks" in the form of abnormally high brokerage commissions from customers seeking IPO allocations. MDCM also claims that CSFB allocated IPO shares to persons and entities in order to secure underwriting roles in other transactions, creating a "pyramid of revenues form sources other than the IPO at hand."

The former Mortgage.com, a provider of online mortgage services, went public on August 1999 when it sold 7.4 million shares at $8 each. CSFB acted as lead underwriter on the offering. Within two weeks, Mortgage.com traded as high as $22.75 a share, almost tripling its IPO price.

Underwriters are compensated by deriving the spread between the price at which it buys the shares and the price it resells them to the public. CSFB allegedly bought nearly 4 million shares at $7.44 each, court documents said.

CSFB underpriced the IPO to increase the profits realized by its customers—profits the banking unit received kickbacks from, MDCM claims.

The banking unit of Credit Suisse group received "excess compensation" from the IPO—more than the 7 percent underwriting fee-- than that contracted by MDCM, the lawsuit said. The former online business is claiming damages from the alleged conduct exceed $75,000.

"We believe these allegations have no merit and will defend ourselves vigorously," said CSFB spokeswoman Victoria Harmon.

A standout

The MDCM lawsuit sticks out because it represents a corporate client of a Wall Street firm alleging IPO impropriety, The Wall Street Journal reported Tuesday.

The lawsuit is another problem for CSFB which is currently the subject of a federal investigation that alleges the bank requires big investors to pony up large commissions in exchange for access to IPOs.

At least six CSFB employees have been notified by the regulatory arm of the National Association of Securities Dealers that they are under investigation. CSFB has placed three employees on administrative leave.

In November, Argentina's Banco Hipotecario acquired Mortgage.com's technology and some employees while a month later, ABN-AMRO bought the Mortgage.com name for $1.8 million.

MDCM has since been delisted from the Nasdaq