U.S. Drops Probe Into IPO Fees

The Justice Department dropped its investigation into whether securities firms illegally conspired to fix the amounts they charge companies to underwrite initial stock sales.

Charles Miller, a Justice Department spokesman, confirmed a Securities and Exchange Commission filing by Goldman Sachs Group Inc., one of a handful of firms named in the probe, that the investigation was dropped.

Securities firms collected about $3 billion in fees for U.S. initial public offerings last year, with Goldman receiving the most at about $669 million, according to Thomson Financial Securities Data. The probe stemmed from a study showing that underwriters consistently charged a 7% fee--particularly for sales in the $20-million-to-$80-million range. Still, even the author of that study doubted that was proof of collusion.

“I always thought it was implausible that there was implicit collusion among investment bankers,” said Jay Ritter, a professor of finance at the University of Florida, whose study on IPO fees helped spark the investigation. “One of the reasons the investigation fizzled out was the lack of a smoking gun.”

Ritter said plaintiffs’ attorneys lacked an “aggrieved” party, or a company that would say it was overcharged in an IPO.

Underwriters charge a commission, or spread, when they take a company public. This commission is subtracted from the gross proceeds of the sale, which equal the number of shares sold times their price.

Several private lawsuits alleging price-fixing on IPO fees were consolidated into a class-action case in February 1999 and are still pending.

Goldman disclosed the investigation two years ago in a filing as it prepared its own IPO. The firm declined to comment further.

In its filing with the SEC on Friday, Goldman said it and other firms were still under investigation in a separate probe into how firms decided IPO share allocations.

Investigators have charged that allocations for some IPOs were based on kickbacks paid through excessive prices for institutional equities. Goldman said it is cooperating with the investigation.