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Chapter 10. How Investment Banks Inflate... > If You Can't Sue City Hall, Can You ...

If You Can't Sue City Hall, Can You Sue Wall Street?

Some lawsuits have been filed on behalf of investors against companies that went public during the bubble. There have not been many, in part because the Private Securities Litigation Reform Act of 1995 has made class action suits more difficult. In general, these suits seek to prove that a company's executives made false and misleading statements about its business prospects and so induced investors to buy the shares. Not only are such suits difficult to prove, but most of the dot-com companies are either out of business or so strapped for cash that they have little to pay successful claimants.

In 2001, more than 1,000 legal suits were filed on behalf of shareholders in some 263 companies that went public during the heyday of high-technology IPOs. “Losses alleged in the suits amounted to between $10 billion and $50 billion,” says James Newman, executive director of Securities Class Action Services LLC, a New York research organization, “while securities-fraud cases tend to settle for an amount of between 7 percent to 12 percent of total losses, meaning that settlements could cost Wall Street firms and issuing companies a total of 'between $1 billion to $5 billion for all of these cases.' The allegations generally track regulatory probes into whether brokerage houses broke securities laws by manipulating stock prices. They did so by requiring customers who received shares in an IPO to place so-called aftermarket orders for additional shares at higher prices, a practice known as 'laddering.' Regulators also are examining whether brokerage houses received inflated commissions from investors in exchange for IPO shares, and whether that amounted to kickbacks that violated federal securities law. Some suits allege antitrust violations from the same circumstances.”[69]


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