A district court has granted in part the motion for class certification in the securities fraud lawsuit against J.P. Morgan Clearing Corp. and J.P. Morgan Securities Inc. involving an alleged investment scam with Sterling Foster & Co. The alleged scheme involves the manipulation of the the market for ML Direct Inc. securities during and after an IPO. The JPM entities are named in their capacity as Bear Stearns & Co. Inc. and Bear Stearns Securities Corp. successors.
The court says that one day after the IPO’s start, ML Direct stock’s price more than doubled because Sterling Foster had bought most of it. The firm then sold over 3.375 million ML Direct at about $14 to $15 a share. Because only 1.1 million shares in the IPO were for sale, the court says that Sterling Foster sold 2.3 million more shares than it owned. The other available ML Direct shares were held by insiders, who had a lock-up agreement barring them from selling their shares within the first year of the IPO unless they obtained underwriter Patterson Travis Inc.’s consent.
Sterling Foster and the insiders allegedly became involved in an undisclosed agreement that allowed the brokerage firm to buy the insiders’ stock at the $3.25/share offering. Sterling Foster then bought their securities, which were delivered to Bear Stearns. The court says that as a result, the brokerage firm made a $24 million profit.
The plaintiffs are saying that the offering documents misled the investing public into thinking that significantly less ML Direct shares were being offered and that the market had set the $13 to $15/share price when Sterling Foster had artificially created it and then bought shares from insiders at the lower share price. The plaintiffs claim that Bear Stearns, as Sterling Foster’s clearing house, knowingly took part in the investment scam.
The plaintiffs moved to certify a class so they could pursue their Section 10(b) and Section 20(a) claims. The court granted the motion as to the Section 10(b) antifraud claims but denied the latter, which involves claims for control person liability.