Reply #115: Silverstream Fraud Class Action June 20, 2000

[DrDebug]

According to a Press Release dated June 20, 2001, a securities fraud class action was filed against Silverstream Software, Inc. The lawsuit asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the SEC thereunder and seeks to recover damages. Any member of the class may move the Court to be named lead plaintiff. If you wish to serve as lead plaintiff, you must move the Court no later than August 20, 2001.

The complaint alleges that Silverstream Software, Inc., David R. Skok, its Chairman, David A. Litwack, its President and CEO, and Craig A. Dynes, its CFO, violated the federal securities laws by issuing and selling Silverstream Software common stock pursuant to the IPO and secondary offering without disclosing to investors that at least two of the lead underwriters in the IPO and secondary offering had solicited and received excessive and undisclosed commissions from certain investors.

In exchange for the excessive commissions, the complaint alleges, lead underwriters Morgan Stanley Dean Witter & Co., Inc. and FleetBoston Robertson Stephens, Inc. allocated Silverstream shares to customers at the IPO price of $16.00 per share. To receive the allocations (i.e., the ability to purchase shares) at $16.00, the defendant lead underwriters' brokerage customers had to agree to purchase additional shares in the aftermarket at progressively higher prices. The requirement that customers make additional purchases at progressively higher prices as the price of Silverstream stock rocketed upward (a practice known on Wall Street as laddering) was intended to (and did) drive Silverstream's share price up to artificially high levels.

This artificial price inflation, the complaint alleges, enabled both the lead underwriters and their customers to reap enormous profits by buying Silverstream stock at the $16.00 IPO price and then selling it later for a profit at inflated aftermarket prices, which rose as high as $32.50 during its first day of trading. The complaint further alleges that Silverstream was able to price the secondary offering of Silverstream stock at an artificially high $114.00 per share due to the continued effects of the foregoing violations. Rather than allowing their customers to keep their profits from the IPO, the complaint alleges, the defendant lead underwriters required their customers to kick back some of their profits in the form of secret commissions.

These secret commission payments were sometimes calculated after the fact based on how much profit each investor had made from his or her IPO stock allocation. The complaint further alleges that defendants violated the Securities Act of 1933 because the Prospectuses distributed to investors and the Registration Statements filed with the SEC in order to gain regulatory approval for the Silverstream offerings contained material misstatements regarding the commissions that the underwriters would derive from the IPO and secondary offering and failed to disclose the additional commissions and laddering scheme discussed above.

http://securities.stanford.edu/1018/SSSW01/