FINRA IPO Investigation

Several banks, including Goldman Sachs and JPMorgan, are close to reaching a settlement with FINRA related to their IPO processes. Information out today suggests that the settlement amount could reach $50 million across seven banks that have been under investigation.

This isn't the first time that Wall Street has faced fines relating to IPO practices, with $1.4 billion assessed in 2003. At that time, firms were accused of pressuring their internal research divisions to issue biased reports which favored companies from whom the banking side was seeking lucrative underwriting business. During the dot.com boom, investment bankers were able to earn substantial revenue by bringing new companies public despite their having little or no business history. The lack of a divide between the supposedly independent and objective research divisions and the for-profit investment banking divisions created a wave of backlash when the internet bubble deflated.

The particular focus of this investigation has been the IPO of Toys "R" Us, which has since withdrawn its public filing. The seven banks under investigation (Goldman, JPMorgan, Bank of America, Credit Suisse, Deutsche Bank, Citigroup and Wells Fargo) were hired to work on the IPO and had meetings with the company and one of its sponsors, private equity firm KKR (Bain Capital is another major owner).

During these meetings, companies often interview research analysts to gather information on how the market might value their company at IPO. FINRA is concerned that research analysts may feel pressure to provide positive assessments and inflated valuations in order to help the banking side get the business. Banks may be in the process of changing their own standards for these meetings, requiring that the conversations be recorded and logged, and allowing analysts to ask management questions, but not the other way around.

FINRA issued fines related to IPO practices earlier in the year as well, so this seems to be an area of intense focus for the organization. FINRA declined to comment on an ongoing investigation (a resolution announcement is expected by year end), and the seven banks involved would only provide comments anonymously.