Shareholders To Reap $1B in Dot-Com IPO Settlement

Scores of technology companies that staged successful initial public offerings between 1998 and 2000 have agreed to settle a rash of lawsuits filed by shareholders. The businesses have agreed to pay at least US$1 billion and to aid the shareholders as they set their sights on underwriters of the controversial IPOs.

Under terms of the tentative agreement with some 309 firms, the $1 billion payout to shareholders in the plaintiff class will be paid mainly by the companies’ insurance firms.

The deal was announced by attorneys for the plaintiffs, who cautioned that it might take a while to finalize the settlement, since it requires the blessing of the board of directors of each company as well as the judge overseeing the case.

A Year in the Making

Lead attorney Melvyn I. Weiss said the settlement was reached between a court-appointed committee of six attorneys and representatives of the defendants after a year in mediation.

“We have always been of the mind that the primary target in this case is the underwriting community,” Weiss said.

Indeed, the settlement could crank up the heat on the 55 investment banks that underwrote the IPOs in question, creating billions of dollars in new wealth in the process.

The suits allege that underwriters conspired with company insiders to intentionally underprice offerings, ensuring a strong Wall Street debut. In exchange, the complaints say, underwriters received extra allotments of stock and other benefits.

The 21-page list of companies named in the various lawsuits includes many well-known high-tech names, such as search sites Ask Jeeves, GoTo.com and LookSmart.com; e-commerce players Buy.com, Ashford.com, Priceline.com, Webvan and Autobytel; software firms Red Hat, McAfee and Blue Martini; Internet content providers Ziff-Davis and MarketWatch.com; and incubator Internet Capital Group.

Others named on the list, such as Martha Stewart Living Omnimedia, are famous for other reasons.

Shifting Focus

The settlement no doubt will increase scrutiny of the investment banks behind the IPO deals, with plaintiffs’ attorneys suggesting they will seek as much as $5 billion as they pursue the claims.

Many of the same banking houses already have signed on to a $1.4 billion settlement of charges brought by regulators who say they misled investors by touting stocks of companies they knew were not performing well.

Although those cases are not directly related to IPOs, they may indicate an overall culture within Wall Street banks that could allow behind-the-scenes IPO dealings to occur, Dartmouth College professor Kent Womack told the E-Commerce Times.

“The incentive system in most banking houses has traditionally been about how much business an analyst brought in, not on how accurate they are,” Womack said.

With IPOs happening at a breakneck pace in the late 1990s, grabbing as big a piece of the action as possible was job one for many firms. “Underwriting can be very lucrative, and at that time there was also virtually no risk, given the public’s appetite for these stocks,” Womack added.

Settle Down

Shareholder lawsuits are nothing new, but they have become a cottage industry since the Nasdaq plummeted, and many have received a boost since regulators revealed how some investment banking houses manipulated stock ratings and duped the public along the way.

Companies appear to be increasingly open to settling such suits. Earlier this year, Lucent agreed to a $600 million settlement of a class-action suit. That deal ranked just behind the $3.5 billion that holding company Cendant has agreed to pay to settle its own suits.