Regulators in the US are examining why two investment funds obtained relatively large chunks of VA Linux's initial public stock offering.
The Securities and Exchange Commission's scrutiny of the funds, GLG Partners and Chelsey Capital, is part of a broader examination into whether some investors paid Wall Street firms unusually large trading commissions in exchange for slices of coveted IPOs, according to people familiar with the probe.
Regulators are investigating whether hedge funds and other investors paid larger-than-normal commissions on other trades with the securities firms that controlled how the IPO shares were allocated, in a bid to boost the amount of the IPO shares they received.
People close to the inquiry say regulators are attempting to determine patterns of big allocations followed in the next few days by jumbo trades in other stocks with outsized commissions of as much as US$1 a share -- 20 times the going rate for institutional investors. Authorities are seeking to determine if these payments may have constituted kickbacks.
The allocations of the VA Linux stock provide an early glimpse of the nascent regulatory probe. Regulators are asking why some of the more-obscure investors received unusually hefty allocations that rivaled those of some of the biggest and best-known investing names on Wall Street.
Regulators are asking why those allocations were awarded and how such small firms could have generated the levels of commissions to warrant them, people familiar with the inquiry say.
Lawyers who represent Wall Street firms have argued that even jumbo commissions may have been legal in the context of the overall relationship between the investors and the securities firms; they say the securities dealers have wide discretion to allocate IPO stock as they see fit in order to manage the offerings.
Huge stakes, huge gains
GLG and Chelsey received 35,000 shares and 15,000 shares, respectively, of the VA Linux deal, a person on Wall Street says, giving them stakes that by the end of the company's first trading day generated one-day paper gains of US$7.3 million and US$3.1 million, respectively, for GLG and Chelsey. It is unclear whether the funds later sold their VA Linux shares.
By comparison, some of the largest US mutual-fund groups -- including Alliance Capital Management and AIM Management Group, which oversee equity assets that dwarf those of GLG, the larger of the two funds -- received 60,000 to 75,000 shares of the Linux deal, the same person said.
