About the Initial Public Offering Securities Litigation

The collapse of the dot.com IPO bubble, led to an unprecedented number of substantially identical private actions being filed by the class action bar. Although there are 309 amended complaints involving 309 issuers, the 309, cases each with separate named plaintiff(s) who bought the securities of the respective companies in the IPO or shares in the aftermarket traceable to the IPO, were consolidated for management purposes and assigned to Judge Scheindlin in the Southern District Court of New York. The court appointed as lead counsel an executive committee consisting of members of six class action law firms. At the direction of the court, plaintiffs filed a separate master allegation. In addition to the 309 issuers named as defendants, 55 investment bank underwriters were named as defendants as well as officers and directors of the issuer. The 55 underwriter defendants included most, if not all, of the big name investment banking firms and some lesser known firms. This is fascinating litigation and has implications for the allocation of “hot issue” IPOs that we do not pursue at this point.

As a backdrop to the Rule 10b-5 claims, Judge Scheindlin has an extensive and informative discussion of the underwriting/distribution arrangements peculiar to new issues “for at least five decades.”[1] She cites studies that the typical IPO is underpriced so that aftermarket trading will open “at a price significantly higher than the offering price.” She draws some conclusions from this that may be arguable — that underpricing overall notwithstanding the money the issuer leaves on the table is attractive to the issuer as the higher market price permits the issuer to use “its stock as currency to make acquisitions, or by raising more capital through a higher-priced secondary offering.”[2] She noted that underpricing is particularly prominent during “hot issue” markets and refers to four such markets for IPOs during the last four decades — 1959-1962, 1967-1971, 1979-1983, and the most recent during which the IPOs subject to the litigation occurred, 1998-2000. She described the earlier hot issue market and noted several aspects of the latter (the dot.com hot market) relative to the others. First, the underpricing in the latter “was more extraordinary than the previous three hot issues markets.”[3] Whereas historically IPOs have been underpriced from 5 to 20%, during the dot.com hot market IPOs frequently opened at 100-200% of the offering price. Second, in a number of other hot markets with somewhat comparable increases in opening over offering price, relatively fewer companies were going public. Citing the month of February 2000 in which 55 companies went public compared to the historical average of 29 companies per month going public whereas in other hot issue markets in some instances the number of companies was well below the historical average. “Likewise, taking into account the number of months that witnessed extraordinary first day increases, the IPO market of the 1990s substantially surpassed each of the previous hot issues markets.”[4]