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Reform Measures Tackle IPO Abuses

May 30, 2003|Walter Hamilton | Times Staff Writer

NEW YORK — A special committee studying reforms of the initial public stock offering market recommended Thursday a variety of measures aimed at stamping out abuses and making sure investors have enough information about the stocks they're buying.

Many of the 20 suggestions would require Wall Street brokerages to provide new information and disclosures to companies and their prospective shareholders.

For example, one recommendation calls for letting small investors view "road shows" -- meetings at which company executives pitch their public offerings to large investors -- via the Internet.

The report suggests barring some of the abuses that became prevalent in the 1990s stock market bubble, such as allocating hot IPOs shares to corporate executives in return for their investment banking business. Securities regulators already have taken steps to prohibit those practices.

However, the report doesn't appear to address what some experts say are the underlying factors behind the IPO abuses of the late 1990s, such as the underpricing of IPO shares that occurred when stock prices soared far beyond the initial price at which investors bought them.

In a footnote, the report said a number of experts advising the committee said that IPOs were "deliberately underpriced" and that the companies issuing the shares may have been "cheated" out of higher prices. But, the footnote said, other experts disagreed and the report did not assume there had been intentional underpricing.

One suggestion aimed at helping small investors would prevent them from placing "market" orders -- instructions to buy a stock regardless of its price -- on the day of an IPO.

Instead, investors would have to place "limit" orders specifying the price they're willing to pay. Preventing open-ended orders could keep ordinary investors from buying at peak prices.

Another recommendation would bar investment banks from penalizing brokers whose small-investor customers quickly sell IPO shares.

Although institutions frequently "flip" IPOs to lock in big first-day gains, retail investors are discouraged from doing so. As a result, some have incurred big losses by holding on to IPOs that initially zoom in price only to plummet later.

The non-binding report from the 14-member committee was requested by former Securities and Exchange Commission Chairman Harvey Pitt and will be used by regulators to help formulate reforms in the IPO market.

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