Morgan Stanley, Bear Stearns Cos. and Deutsche Bank AG were fined $15 million Tuesday and censured by the National Association of Securities Dealers for collecting outsize commissions for allocating shares of initial public offerings to favored clients.
The firms violated regulatory rules by accepting commissions "far in excess of the typical rate of 6 cents a share" from customers one day after selling them shares in IPOs, the NASD said. Morgan Stanley will pay $5.39 million, Deutsche Bank $5.29 million and Bear Stearns $4.95 million.
"None of these firms was providing unusual or extraordinary services to justify these very high commissions," said Mary L. Schapiro, NASD vice chairman and president of regulatory policy and oversight, in a statement. The brokerages had a duty to investigate why they were receiving such large payments for routine trades, she said.
Securities firms have come under scrutiny by the NASD, the Securities and Exchange Commission and state regulators amid allegations they doled out shares in IPOs to win business from investment banking clients. In January 2002, Credit Suisse First Boston agreed to pay $100 million to settle conflict charges with regulators, including claims the bank demanded kickbacks of as high as $3.15 a share from investors seeking IPO shares.
The firms are pleased to have reached the NASD settlement, said spokeswomen Melissa Stonberg of Morgan Stanley, Rohini Pragasam of Deutsche Bank and Elizabeth Ventura of Bear Stearns. The companies didn't admit or deny wrongdoing.
Morgan Stanley will pay $4.9 million to the NASD for profits it made from inflating commissions for 25 customers, as well as a $490,000 fine. Deutsche Bank agreed to give up profits of $4.81 million and pay a fine of $481,000. Bear Stearns will relinquish $4.5 million and was fined $450,000.
In November 1999, Bear Stearns, the seventh-largest securities firm, allocated 125,000 shares in an IPO to one customer, generating more than $1 million in profit for the client, the NASD said. Later that day the same client sold 50,000 shares of a widely traded stock and paid a commission of $2 per share, or $100,000. That trade should have cost 6 cents a share, or $3,000, the NASD said.
In March 2000, Deutsche Bank sold 25,000 shares of online auction operator Fairmarket Inc. to a customer. The stock jumped 185 percent to $48.50 from $17 in the first day of trading. The next day the customer paid Deutsche Bank a total of $800,000 for trades of listed stocks that would usually have borne a commission of $63,000, the NASD said.
Morgan Stanley, the second-largest securities firm, sold a client 1,000 shares of an IPO for $35 a share. The stock closed at $212.625 at the end of the day. The same day, Morgan Stanley got $3 a share for trading 20,000 shares of a listed security, $58,800 more than the commission would have been at the rate of 6 cents a share.
"These violations took place during the bubble," Barry Goldsmith, head of NASD enforcement, said in an interview. "When investors are paying $1, $2 or in one case $3 a share in commissions we can't just sit there and accept them."
The NASD cited examples of e-mails at all three firms that noted evidence of the unusually large commissions and customer satisfaction with the IPO profits.
While there are no cases pending against other Wall Street firms, future actions may arise, Goldsmith said.