The 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 $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 (lnux) 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.
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 $7.3 million and $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 U.S. 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.
London-based GLG and Chelsey, New York, have been contacted by the SEC's enforcement staff in connection with the IPO investigation, the people familiar with the inquiry say. "Chelsey Capital has no reason to believe that it is in any way the focus of an IPO probe, and it is confident that it has complied with all rules and regulations," Chelsey said in a statement; it declined to comment further. A senior GLG official declined to comment.
The number of IPO shares received by GLG and Chelsey is surprisingly large for the funds' size, some Wall Street executives say, particularly when measured against some of the big mutual-fund groups that got stock in the deal. GLG -- a unit of Lehman Brothers Holdings from 1995 until last April -- manages $6.5 billion in assets, according to BigDough.com, an online database. Chelsey says it manages about $1 billion. Alliance, by contrast, manages about $325 billion in stock assets and AIM manages $125 billion.
The VA Linux offering is an early focus of the investigation, which is being conducted jointly by the SEC's enforcement division and the U.S. attorney for the Southern District of New York. Neither agency would comment. The lead underwriter of the VA Linux deal, Credit Suisse Group's Credit Suisse First Boston unit, also is an early focal point of the probe. The big Wall Street securities firm has confirmed the inquiry, but has said its allocations were in line with industry practice; the firm declined to comment on any aspect of the VA Linux deal.
Shares of VA Linux, which went public at $30, closed on their first day of trading Dec. 9, 1999, at $239.25, up 697.5 percent -- the largest first-day gain for any IPO, according to Thomson Financial Securities Data. The Fremont, Calif., concern, which sells computer systems using Linux operating software, went public at the peak of a technology-stock mania that routinely sent IPO shares soaring on their first day of trading, producing massive paper profits for investors lucky enough to obtain the shares. A VA Linux spokesman declined to comment.
It isn't clear whether GLG or Chelsey paid large commissions or are a particular focus of the SEC probe. Indeed, regulators have sought information from a number of other hedge funds and most major Wall Street securities firms that led hot IPOs in the 1998-2000 period, including Morgan Stanley Dean Witter, Goldman Sachs Group and Lehman Brothers Holdings. Hedge funds manage money mainly for wealthy individuals.
The subpoenas issued to the Wall Street firms last month sought lists of which investors got 1,000 shares of hot IPOs, as well as records of big trades of 10,000 shares or more executed with commissions of more than twice the prevailing rate for institutional investors of five cents per share.
Another investor receiving an unusually sizable number of VA Linux shares in the IPO has had ties with Frank Quattrone, a Wall Street investment banking superstar and head of Credit Suisse First Boston's technology-investment-banking group. An allocation of 50,000 VA Linux IPO shares was received by Technology Crossover Ventures, a Palo Alto, Calif., venture-capital fund that has raised more than $2.5 billion and invests in Internet concerns both before and after they go public. Jay Hoag, a general partner of the company, has done business frequently with Quattrone and CSFB. Last year, Quattrone's technology group placed Hoag at the top of a reference list of Quattrone's close venture-capital contacts. Quattrone didn't respond to requests for comment.
In an interview, Hoag confirmed that his funds received an allotment of VA Linux shares. He also said CSFB led six of the 22 IPOs of companies backed by Technology Crossover Ventures in 1999 and 2000, a greater number than CSFB's Wall Street rivals.
Technology Crossover got VA Linux shares -- which generated a one-day paper profit of $10.5 million -- even though it didn't play any role in financing VA Linux before the offering. The venture firm declined to comment about whether it still holds the VA Linux shares, which stood at $7.56 as of 4 p.m. Friday in Nasdaq Stock Market trading.
GLG and Chelsey also received big slices of other technology IPOs in 1999, according to Wall Street "pot lists." These secret lists provide a rundown of IPO shares awarded to institutional investors. The lists don't include the names of wealthy individual investors who get shares from stockbrokers.
For example, in September 1999 GLG received 100,000 shares of an IPO of Foundry Networks -- the same size allocation as mutual-fund giants Alliance and Janus Capital. The Foundry IPO was led by Deutsche Banc Alex. Brown, a unit of Deutsche Bank. The stock jumped 525 percent on its first day of trading from its IPO price of $12.50 a share, adjusted for a subsequent stock split, closing on Sept 28, 1999, at $78.13. A spokeswoman for Deutsche Banc Alex. Brown didn't respond to a request for comment.
In another IPO, Chelsey received 35,000 shares of Fogdog -- more than much larger managers such as J&W Seligman, which manages $26 billion, and Pequot Capital Management, a hedge fund that manages $8.5 billion. The Fogdog offering in December 1999 also was led by Credit Suisse First Boston and rose a comparatively moderate 19.3 percent on its first day.
While little known in the U.S., GLG's principals -- led by Noam Gottesman, Pierre LaGrange, and Jonathan Green -- have been associated with two major Wall Street firms. All three worked as managers of a London hedge fund at Lehman Brothers from September 1995 to April 2000, when they left to operate the fund on their own. Earlier in the 1990s, they all worked at Goldman, where they managed money for wealthy individuals. Spokespeople for Lehman and Goldman declined to discuss GLG's operations. A spokesman for Messrs. Gottesman, LaGrange and Green declined to comment.
GLG manages hedge funds, which invest in European and U.S. stocks with large market capitalizations, according to BigDough.com. The funds, which also can bet on stock-price declines by selling short, are said by other traders to be active participants in IPOs, making big profits on such offerings last year.
Chelsey Capital manages a so-called venture-capital crossover fund, which invests in companies both before and after they go public, BigDough.com says. The company's holdings have been concentrated in financial, technology and Internet stocks.
The largest allocation of VA Linux stock, according to the same person on Wall Street, was received by Fidelity Investments, the Boston mutual-fund giant that manages $676.3 billion in stock assets and got 250,000 VA Linux shares. Assuming it held the shares until the end of the first day of trading, Fidelity's paper profit on the stock would have been $52.3 million on an initial investment of $7.5 million.
The next biggest allocations of the VA Linux IPO were received by Putnam Investment Management and Janus, with 125,000 shares each, Alliance and J.P. Morgan, now part of J.P. Morgan Chase, with 75,000 shares apiece, Pilgrim Baxter & Associates at 65,000 shares and AIM at 60,000 shares. Wall Street executives say Fidelity has routinely demanded and received IPO allocations twice as large as any other money manager.
Another recipient of IPO shares in VA Linux was Credit Suisse Zurich, a money-management affiliate of Credit Suisse First Boston, which received 35,000 shares. The Securities and Exchange Commission, intensifying its investigation into questionable IPO practices, is examining the activities of two little-known investment funds that obtained relatively large chunks of VA Linux Systems' initial public stock offering.
The 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 $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 (lnux) 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.
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 $7.3 million and $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 U.S. 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.
London-based GLG and Chelsey, New York, have been contacted by the SEC's enforcement staff in connection with the IPO investigation, the people familiar with the inquiry say. "Chelsey Capital has no reason to believe that it is in any way the focus of an IPO probe, and it is confident that it has complied with all rules and regulations," Chelsey said in a statement; it declined to comment further. A senior GLG official declined to comment.
The number of IPO shares received by GLG and Chelsey is surprisingly large for the funds' size, some Wall Street executives say, particularly when measured against some of the big mutual-fund groups that got stock in the deal. GLG -- a unit of Lehman Brothers Holdings from 1995 until last April -- manages $6.5 billion in assets, according to BigDough.com, an online database. Chelsey says it manages about $1 billion. Alliance, by contrast, manages about $325 billion in stock assets and AIM manages $125 billion.
The VA Linux offering is an early focus of the investigation, which is being conducted jointly by the SEC's enforcement division and the U.S. attorney for the Southern District of New York. Neither agency would comment. The lead underwriter of the VA Linux deal, Credit Suisse Group's Credit Suisse First Boston unit, also is an early focal point of the probe. The big Wall Street securities firm has confirmed the inquiry, but has said its allocations were in line with industry practice; the firm declined to comment on any aspect of the VA Linux deal.
Shares of VA Linux, which went public at $30, closed on their first day of trading Dec. 9, 1999, at $239.25, up 697.5 percent -- the largest first-day gain for any IPO, according to Thomson Financial Securities Data. The Fremont, Calif., concern, which sells computer systems using Linux operating software, went public at the peak of a technology-stock mania that routinely sent IPO shares soaring on their first day of trading, producing massive paper profits for investors lucky enough to obtain the shares. A VA Linux spokesman declined to comment.
It isn't clear whether GLG or Chelsey paid large commissions or are a particular focus of the SEC probe. Indeed, regulators have sought information from a number of other hedge funds and most major Wall Street securities firms that led hot IPOs in the 1998-2000 period, including Morgan Stanley Dean Witter, Goldman Sachs Group and Lehman Brothers Holdings. Hedge funds manage money mainly for wealthy individuals.
The subpoenas issued to the Wall Street firms last month sought lists of which investors got 1,000 shares of hot IPOs, as well as records of big trades of 10,000 shares or more executed with commissions of more than twice the prevailing rate for institutional investors of five cents per share.
Another investor receiving an unusually sizable number of VA Linux shares in the IPO has had ties with Frank Quattrone, a Wall Street investment banking superstar and head of Credit Suisse First Boston's technology-investment-banking group. An allocation of 50,000 VA Linux IPO shares was received by Technology Crossover Ventures, a Palo Alto, Calif., venture-capital fund that has raised more than $2.5 billion and invests in Internet concerns both before and after they go public. Jay Hoag, a general partner of the company, has done business frequently with Quattrone and CSFB. Last year, Quattrone's technology group placed Hoag at the top of a reference list of Quattrone's close venture-capital contacts. Quattrone didn't respond to requests for comment.
In an interview, Hoag confirmed that his funds received an allotment of VA Linux shares. He also said CSFB led six of the 22 IPOs of companies backed by Technology Crossover Ventures in 1999 and 2000, a greater number than CSFB's Wall Street rivals.
Technology Crossover got VA Linux shares -- which generated a one-day paper profit of $10.5 million -- even though it didn't play any role in financing VA Linux before the offering. The venture firm declined to comment about whether it still holds the VA Linux shares, which stood at $7.56 as of 4 p.m. Friday in Nasdaq Stock Market trading.
GLG and Chelsey also received big slices of other technology IPOs in 1999, according to Wall Street "pot lists." These secret lists provide a rundown of IPO shares awarded to institutional investors. The lists don't include the names of wealthy individual investors who get shares from stockbrokers.
For example, in September 1999 GLG received 100,000 shares of an IPO of Foundry Networks -- the same size allocation as mutual-fund giants Alliance and Janus Capital. The Foundry IPO was led by Deutsche Banc Alex. Brown, a unit of Deutsche Bank. The stock jumped 525 percent on its first day of trading from its IPO price of $12.50 a share, adjusted for a subsequent stock split, closing on Sept 28, 1999, at $78.13. A spokeswoman for Deutsche Banc Alex. Brown didn't respond to a request for comment.
In another IPO, Chelsey received 35,000 shares of Fogdog -- more than much larger managers such as J&W Seligman, which manages $26 billion, and Pequot Capital Management, a hedge fund that manages $8.5 billion. The Fogdog offering in December 1999 also was led by Credit Suisse First Boston and rose a comparatively moderate 19.3 percent on its first day.
While little known in the U.S., GLG's principals -- led by Noam Gottesman, Pierre LaGrange, and Jonathan Green -- have been associated with two major Wall Street firms. All three worked as managers of a London hedge fund at Lehman Brothers from September 1995 to April 2000, when they left to operate the fund on their own. Earlier in the 1990s, they all worked at Goldman, where they managed money for wealthy individuals. Spokespeople for Lehman and Goldman declined to discuss GLG's operations. A spokesman for Messrs. Gottesman, LaGrange and Green declined to comment.
GLG manages hedge funds, which invest in European and U.S. stocks with large market capitalizations, according to BigDough.com. The funds, which also can bet on stock-price declines by selling short, are said by other traders to be active participants in IPOs, making big profits on such offerings last year.
Chelsey Capital manages a so-called venture-capital crossover fund, which invests in companies both before and after they go public, BigDough.com says. The company's holdings have been concentrated in financial, technology and Internet stocks.
The largest allocation of VA Linux stock, according to the same person on Wall Street, was received by Fidelity Investments, the Boston mutual-fund giant that manages $676.3 billion in stock assets and got 250,000 VA Linux shares. Assuming it held the shares until the end of the first day of trading, Fidelity's paper profit on the stock would have been $52.3 million on an initial investment of $7.5 million.
The next biggest allocations of the VA Linux IPO were received by Putnam Investment Management and Janus, with 125,000 shares each, Alliance and J.P. Morgan, now part of J.P. Morgan Chase, with 75,000 shares apiece, Pilgrim Baxter & Associates at 65,000 shares and AIM at 60,000 shares. Wall Street executives say Fidelity has routinely demanded and received IPO allocations twice as large as any other money manager.
Another recipient of IPO shares in VA Linux was Credit Suisse Zurich, a money-management affiliate of Credit Suisse First Boston, which received 35,000 shares.
