WMLR predictions of the end of banks' protective secrecy come true in US IPO case

World Money Laundering Report and World Money Laundering Report: Online have carried many stories about the class actions brought in the USA and about the manner in which both internal and regulatory documents are increasingly available to those bringing class actions, warning that the combination of the two would be a nightmare scenario for financial services businesses. For more than 50 investment banks and securities houses and more than 300 traded companies, the nightmare has become reality.

New York Judge Shira Scheindlin ordered yesterday (20 Feb) that thousands of pages of documents must be disclosed if the plaintiffs ask for them. And they will: there is a great motivation to do so.

The documents are internal documents relating to their relationship with their customers. The plaintiffs in the case allege, amongst other things, collusion between the banks and their customers in which shares were sold in an initial public offering with a secret deal for the bank to buy more once the shares started to trade. Investors allege that this distorted the market and drove up prices in stock that should not have reached such prices.

Credit Suisse First Boston Inc. are in trouble in this suit, too. Already targeted in other class actions, and recently suffered regulatory proceedings in Tokyo for, amongst other things, shredding documents. And last week, they admitted shredding documents in New York, too, saying that it was an internal misunderstanding in the technology department.

The Judge saw prima facie evidence of malpractice: "The Plaintiffs have alleged [a] coherent scheme to defraud, the entire purpose of which was to artificially drive up the price of the securities" she said in her opinion that ran to almost 250 pages.

It amounts to open season on the banks and their clients and breaks wide open any last vestiges of bank secrecy in the USA where any hint of fraud or malpractice can be established.

The CSFB problems are deep: two weeks ago, they placed Frank Quattrone on indefinate leave after allegations of document shredding came to light. Quattrone gained fame by the audacious recruiting of an entire team from Lehman Brothers after they beat him in a deal to run a large IPO - he led the IPOs of Netscape and others and his reputation brought in many large deals: the bigger the deals he did, the more his reputation was enhanced and the more business followed. Also around two weeks ago, National Association of Security Dealers announced that it was bringing regulatory proceedings against Quattrone. Regulatory filings and disclosed documents show that, in December 2000, Quattrone was informed by CSFB's lawyers that an investigation was under way. On of his team promptly wrote to CSFB's technology department warning them of the risk of action based on documents showing that some of the companies they promoted were not the quality they led the markets to believe. It is on the basis of that memo that CSFB had to make its admissions in Court last week.

In the light of the Enron saga, where considerable media attention was focussed on the shredding of documents, there is an immense hurdle to overcome where such is discovered in any other case. It creates a very prejudicial atmosphere and there is little doubt that the fact that documents have been destroyed is cause for increased powers of discovery in the hands of plaintiffs. In the meantime, the lawyers are rubbing their hands. They are expecting a substantial share of damages that they now gleefully say may exceed the magic "USD 1 Bn" (they mean milliard) which will see them enjoy unprecedented press coverage and a probably surge in business. In that respect, not unlike the banks they are chasing, really.