Giant IPO Suit Hinges on Defense Motion

NEW YORK —  A mountainous lawsuit claiming that Wall Street brokerages and their corporate clients rigged hundreds of initial public stock offerings has hardly begun, but the most important arguments may have already been made.

Friday was the deadline for the final documents in a motion to throw the case out. The motion was made by defendants including Goldman Sachs Group Inc. and Credit Suisse First Boston and once-hot companies including now-defunct EToys Inc.

The motion is a standard defense tool, but lawyers on both sides say that expanding government investigations into IPO practices, the breadth of litigants and the sheer size of a potential settlement make this ruling particularly critical.

Barring an outright dismissal, U.S. District Judge Shira Scheindlin has an array of options in deciding how the case proceeds. Because both sides are expected to be more interested in settling than going to trial, the judge’s decision will have a major effect on each side’s position of strength during settlement negotiations.

“This is especially important,” said Melvyn Weiss, managing partner at Milberg, Weiss, Bershad, Hynes & Lerach and co-chair of the executive committee representing plaintiffs.

The ruling will tell “not only which parties are in the case but which claims are viable, and that will give lawyers more ability to guard their clients in settlement talks,” Weiss said.

The ruling itself could take months because it requires reviewing all 308 IPOs implicated--many of which are technology companies--and addressing issues for dismissal that are common to each.

But Scheindlin, who presides in the Southern District of New York, has a reputation for setting an aggressive schedule. She refused requests from both sides to extend the period for the last motion.

The final response by the issuers in the dismissal process was due Friday, but the judge is believed to have been reviewing the documents since initial motions were presented July 3.

The motion and opposing responses also have been pored over by a platinum list of litigation firms. Securities lawyers representing 55 underwriting investment banks and the 308 issuer companies have tried to punch holes in the range of complaints with six motions to dismiss.

Investors, led by class-action attorneys, allege that there was industrywide misconduct to artificially boost demand and the price of IPO shares during the bull market.

Among the complaints: that brokerage analysts manipulated the market with overly optimistic research; that investment banks charged buyers excessive commissions in exchange for access to IPO shares; and that investors who received IPOs were required to buy shares in the after-market in a practice known as “tie-ins.”

A key defense argument is that allegations have been made with too broad a brush, and do not provide the detailed support required to bring claims of fraud. In the tie-in arguments, for instance, the complaints lack specific instances for each investment bank, defense lawyers say.

“You can’t just say there’s fraud; you need to set forth detailed allegations. You need some meat on the bone,” said Joseph De Simone, an attorney at Mayer, Brown, Rowe & Maw, which represents GigaMedia Inc. and several other issuer defendants.

Even if the allegations are true, there is no evidence to show a related cause of investors’ losses, defense attorneys say. During the euphoria of the late 1990s, demand for IPOs would have been high under any circumstances, and investors would have lost money in the market downturn regardless, they argue.

The group of attorneys representing banks, which are the primary target, include Gandolfo DiBlasi from New York-based Sullivan & Cromwell, the lead counsel for Goldman Sachs and the liaison for the entire group.

CSFB, an investment bank owned by Credit Suisse Group, is being represented by Robert McCaw from Washington-based Wilmer, Cutler & Pickering, who represented the bank’s Swiss parent in litigation over the assets of Holocaust victims. Neither DiBlasi or McCaw could be reached for comment.

But the argument that no legal lines were crossed has become more difficult amid a steady stream of headlines from government investigations into alleged fraud by investment banks.

Among the probes is an extensive review by the House Financial Services Committee into the IPO allocations and research practices of Citigroup Inc.’s Salomon Smith Barney unit, as well as into practices of Goldman Sachs and CSFB.

New York Atty. Gen. Eliot Spitzer and other state securities regulators are conducting their own probes into brokerage conduct.

Driven by a flow of new evidence, the Securities and Exchange Commission is expected soon to announce a set of new regulations governing investment banks, which could include a complete divorce between investment banking operations and sell-side research departments.

Bad press can be a powerful incentive to settle legal suits and bring closure, said James Cox, a securities law professor at Duke University and a member of the New York Stock Exchange legal advisory committee.

“Press reports can substantiate claims,” Cox said. “These government investigations have brought a lot of things to light.”

All of that could put pressure on the defendants to settle if the plaintiffs’ case emerges from the dismissal motion on strong footing. The alternative of bringing the case to trial could take years and cost millions in legal fees. Many experts believe a trial is highly unlikely.