WASHINGTON (AP) -- The government is investigating whether Wall Street securities firms conspired to dictate the highly lucrative fees they charge companies to arrange for the sale of their stock to the public.
The Justice Department probe takes aim at one of the financial industry's most important and growing businesses, one that generated $12.5 billion in fees in 1997.The investigation was disclosed Friday in a filing with securities regulators by Goldman, Sachs & Co., Wall Street's largest privately held securities firm, which said it had received a civil subpoena for documents. Goldman was required by securities laws to reveal the subpoena. The firm insisted the investigation would not delay its unrelated plans to sell of billions of dollars of its own stock next week.
Subpoenaes also went to most of Wall Street's top underwriters.
"The Antitrust Division is looking at the possibility of anti-competitive practices in underwriting services for initial public offerings," Justice Department spokeswoman Gina Talamona said. She declined further comment.
The wide scope of the government's investigation was reminiscent of a landmark 1994 case in which federal regulators and the Justice Department accused major dealers on the Nasdaq Stock Market of conspiring in a form of price-fixing that cheated investors out of billions of dollars on their trades.
In settlements with the Securities and Exchange Commission in January, 28 major brokerage firms agreed to pay more than $26 million in fines. And in a 1996 civil antitrust settlement with the Justice Department, 24 firms agreed to improve their compliance procedures and tape-record some telephone calls made and received by traders. The Wall Street firms neither admitted to nor denied wrongdoing.
Goldman, Sachs said in an SEC filing Friday that the Justice Department had issued it a civil subpoena for information "with respect to its investigation of an alleged conspiracy among securities underwriters to fix underwriting fees."
Those fees can be enormous.
Investment firms earned some $12.5 billion from underwriting in 1997, the latest year for which figures are available, according to the Securities Industry Association. That was up from about $11.2 billion in 1996 and $3.2 billion in 1990.
The investigation comes at a time when the market for new stock offerings is booming as companies are looking to take advantage of the investor confidence that is sending the Dow Jones industrial average to new heights.
A total of 374 companies went public last year, raising a combined $36.8 billion. That's up from 172 companies and $4.5 billion in 1990, according to Securities Data Co.
The investigation covers similar ground to a lawsuit filed by an individual investor last fall against Goldman and the other big Wall Street investment firms, alleging that they conspired to fix their underwriting fees for initial public offerings, known as IPOs.
Investment firms band together in syndicates to spread their financial risk in IPOs, with one firm acting as lead underwriter. As underwriters, the investment firms buy a new issue of securities from the company issuing the stock and then resell them to the public.
As compensation, the underwriting firms receive a discount from the issuing companies on the stock's offering price.
In a suit filed last year in federal court in New York against the Wall Street firms, investor Harold Gillett alleged that they colluded to fix at 7 percent the discount that underwriting syndicates receive in some IPOs. Gillett called that level "artificially inflated" and maintained it unfairly favored the investment firms over the investors buying the stock in the offerings.
The Securities Industry Association, an investment industry group, defended underwriting practices in a statement released Friday.
"The competition among firms to underwrite initial public offerings is intense in U.S. capital markets that are the world's envy for their efficiency, low cost, professional standards and regulatory safeguards. Underwriting fees are a function of this highly competitive market," the association's statement said.
Lehman Brothers Holdings Inc., Salomon Smith Barney, and Donaldson, Lufkin & Jenrette Inc. all confirmed that they also had received a civil subpoena from the Justice Department's Antitrust Division.
A similar request was received by Morgan Stanley Dean Witter & Co., according to an executive who spoke on condition of anonymity. A market source familiar with the investigation said requests also went to Merrill Lynch & Co., Hambrecht & Quist and BancBoston Robertson & Stephens.
Merrill Lynch & Co., J.P. Morgan & Co., Credit Suisse First Boston, Morgan Stanley Dean Witter and BancBoston Robertson & Stephens all declined to comment Friday on the Justice Department's request for information. A call seeking comment from Hambrecht & Quist was not immediately returned.
A spokeswoman for Bear Stearns & Co. said, "As far as we know, we don't believe we have received a subpoena."
Next week, in one of the biggest initial public offerings ever, Goldman, Sachs plans to raise as much as $3 billion selling stock in itself in its first IPO.
"This will not affect our plans to go public," said a spokesman for Goldman, who spoke on condition of anonymity. "This request for information from the Department of Justice is a follow on to the pre-existing private class action litigation which has been ongoing for several months."