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Small Investors Unlikely to Benefit From IPO Probe

Securities: Even prosecutions may not change a system that favors top investment banking firms and their most prized clients.


Yet WR Hambrecht, which launched its system in April 1999, has conducted only seven IPOs based on such auctions.

And many analysts question whether the government could, or should, get into the business of mandating a specific IPO system.

Many company executives prefer the current IPO marketing system for a number of reasons, including their belief that buyers lined up by brokerages are more likely to hold the shares longer.

Other ideas to improve the IPO process include opening road shows to all investors, strengthening the firewall between brokerage analyst reports and investment banking income, and even forcing company executives to offer some of their own shares in their IPO sale, thereby boosting their interest in getting a high initial price.

But few experts expect wholesale change in the foreseeable future.

"If change is going to come, it's going to come because small investors who are frozen out of the process somehow generate a large enough voice to force that change," Aggarwal said. "I'm just dubious that's going to happen."

Times staff writer Joseph Menn can be reached by e-mail at


The IPO Game, 1990s-Style

As the sums raised in initial public stock offerings soared in the 1990s, so did the stocks' gains on their first trading days. That was money "left on the table," or forfeited--meaning it was the amount IPO-issuing companies conceivably could have received if the stocks has been priced according to true demand. Industry insiders say some of that money was funneled back to the investment banks, as kickbacks by the investors who profited handsomely by buying at the IPO prices.

Excluded are smallest IPOs, foreign companies selling U.S. shares, and IPOs of closed-end mutual funds and real estate investment trusts. First-day gains are derived from the difference between IPO price and the closing price on the first day of public trading.

Sources: Jay Ritter, professor at the University of Florida; Securities Data Co.

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