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J.P. Morgan Agrees to Pay $6 Million Fine for Improper IPO Commissions

By Walter Hamilton
LOS ANGELES TIMES -- NEW YORK

J.P. Morgan Chase & Co. agreed Thursday to pay a $6 million fine for taking oversized trading commissions from investors who bought shares of initial public stock offerings through its San Francisco-based investment bankers.

Securities regulators alleged that the country’s second-largest banking company improperly shared in the profits of its IPO customers by accepting commissions of as much as 20 times the prevailing rate. The investors were primarily institutions such as hedge funds.

The alleged infractions were committed by Hambrecht & Quist, a small San Francisco investment bank that J.P. Morgan acquired in late 1999. H&Q was one of a handful of San Francisco-based technology-investment firms that was bought out by much larger rivals in the late 1990s.

The wrongdoing occurred from November 1999 through March 2000, when H&Q was lead manager on a dozen IPOs, including Immersion Corp. of San Jose, Calif., San Diego-based Websense Inc. and PFSweb Inc. of Plano, Texas.

The allegations against J.P. Morgan are similar to those lodged against FleetBoston Financial Corp. in January and Credit Suisse First Boston, a unit of Credit Suisse Group, early last year. FleetBoston paid $28 million to settle the probe of its company, while CSFB shelled out $100 million.

The fines grew out of a wide-ranging investigation by securities regulator NASD -- formerly the National Assn. of Securities Dealers -- into whether major Wall Street firms took kickbacks from investors seeking lucrative IPO shares.

In its settlement, J.P. Morgan neither admitted nor denied guilt.

A spokesman for the company said customers were not asked to pay inflated commissions.

“The NASD did not make any charges claiming that H&Q or any employee of H&Q ever demanded or requested payments for IPO shares,” the spokesman said. “Some clients may have placed more trades with H&Q or voluntarily paid higher commissions in order to be viewed as higher revenue customers, but not at the company’s request.”

According to the NASD, the outsized commissions weren’t paid on the IPO transactions. Rather, investors buying IPO shares paid inflated commissions to buy other stocks that were more widely traded. More than 90 customers forked over commissions as high as $1.25 a share, compared with the normal rate of 6 cents, the NASD said.

In one instance, the NASD said, J.P. Morgan’s commission revenue surged to $2.2 million on the day one IPO began trading, up from $590,000 a day earlier.

One investor paid $575,000 in commissions that normally would have been less than $85,000, the NASD said.