Banks Become Main Target of Defrauded Investors

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February 17, 2005--Who's at fault for the Internet boom and bust of a few years ago? Investors, bankers, and companies involved in the bubble have been arguing over that, and on Tuesday, a judge's action indicated that the fault may lie with the banks--or at least investors can argue that in court.

The judge, Shira A. Scheindlin of the United States District Court in Manhattan, gave preliminary approval to a settlement between about 300 companies that went public during the bubble, and the investors. The settlement essentially makes 55 investment banks the subject of the investors' suit. The investors are arguing that the banks defrauded them by offering IPO shares to top clients, drove up prices through trading deals, and got the deals in the first place based on shoddy research. According to the settlement, if the investors get more than $1 billion from the banks, the companies don't have to pay; if they get less than $1 billion, the companies pay the difference.

The banks have tried to dismiss the case--Judge Scheindlin denied that--and to block the settlement. The settlement, they argued, created an incentive for the companies to finger them and reduced the companies' liability. Judge Scheindlin also found that argument without merit.

The decision indicates banks may be liable for touting companies irresponsibly. Where, though, does an enthusiastic sales pitch cross the line? Should companies accept responsibility for their fates? And why shouldn't investors accept the risk for non-FDIC insured investments? As this case ambles toward trial, expect to see more of those questions raised.

Last updated: Feb 17, 2005




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