J.P. Morgan Agrees To Settle IPO Case For $425 Million

J.P. Morgan Chase & Co. agreed to pay $425 million to settle civil charges of improperly awarding hot new stock issues during the market bubble, indicating Wall Street's tab for the class-action case could hit $4 billion.

The financial-services company reached a memorandum of understanding with investor plaintiffs to settle the federal case, according to Melvyn Weiss, chairman of the executive committee of six law firms [including Wolf Haldenstein] representing plaintiffs.

A J.P. Morgan spokesman confirmed the agreement in principle, which is subject to court approval. He said it would have "no material adverse affect on our financial results," indicating the bank has likely already set aside funds to cover it.

The lawsuit accused underwriters of improperly pumping extra air into the stock-market bubble in 1999 and 2000 by requiring investors who got shares of hot initial public offerings to buy more shares at higher prices once trading began.

The alleged practices by the 54 underwriter defendants could have worsened losses of investors who bought at the higher prices when the bubble burst, the plaintiffs charged. The practices at issue became known as "laddering."

Several Wall Street underwriters settled such charges by regulators in the years 2003 to 2005. For example, Goldman Sachs Group Inc. and Morgan Stanley in January 2005 agreed, without admitting or denying wrongdoing, to pay a combined $80 million to settle charges by the Securities and Exchange Commission that they violated an antimanipulation rule. J.P. Morgan also settled with the SEC for $25 million in October 2003.

The case also alleged some underwriters profited improperly from the IPOs' first-day price gains by obtaining oversize commissions from some investors who got stock at the issue price. And the suit charged that some of the stocks' post-IPO price gains were inflated by biased bullish research. Ten firms paid $1.4 billion in 2003 to settle regulatory charges of biased research and other IPO abuses.

The investor plaintiffs were assured of recovering at least $1 billion under a settlement reached in June 2003 with insurers for companies that issued more than 300 IPOs in the case.

In an interview, Mr. Weiss said IPOs led by J.P. Morgan Chase accounted for less than 10% of the total damages calculated by the plaintiffs -- suggesting the total tab could reach $4 billion.

A slew of Wall Street firms were socked with lawsuits for the role they played in financing highflying companies that floundered when the bubble burst.

By being the first in line to settle this case, J.P. Morgan is pursuing a far different strategy than it did last year when it was the last big holdout to settle a class-action suit filed by investors in WorldCom Inc. In that case, J.P. Morgan initially rejected a settlement offer of $1.37 billion, but ultimately agreed to pay $2 billion.