June 14, 2011

Welcome to Suzanne Rothwell!

We’re very excited to announce the addition of Suzanne Rothwell to our editor staff. Suzanne brings a wealth of experience to our team. She recently retired from Skadden Arps after a decade of service here in DC. Previously, she served for 20 years in increasingly responsible positions with FINRA, including Associate Director and Chief Counsel of the Corporate Financing Department. At Nasdaq, she served as Special Counsel on the PORTAL Market and the development of trade reporting for debt securities. You’ll be seeing Suzanne on this blog – and our other blogs – as well as other parts of our sites.

The On-Going IPO Pricing Discussion: The Issuer’s Responsibility

And here’s a blog from Suzanne:

There has been quite a bit of commentary on the pricing of the LinkedIn IPO, which went public at $45 a share and closed at $94 on the first day of trading (including this entry in our “Mentor Blog”). The stock has traded as high as $122.69 and has since declined to close on June 7th at $77.82. One columnist questioned whether the underwriters of the LinkedIn IPO severely and intentionally underpriced the public offering in order to benefit customers who then immediately sold the stock to lock in the profit. (“Was LinkedIn Scammed?,” Joe Nocera, NY Times).

Another view was that possibly the IPO price for LinkedIn was too high as it resulted in a valuation of $8 billion for a company that made only $15.4 million in 2010. (“Why LinkedIn’s Price May Have Been Right,” Andrew Ross Sorkin, NY Times). Mr. Sorkin correctly points to the inherent conflict of IPO underwriters in meeting the interests of the company they are taking public and of their customers. He states that this is an “untenable position” and asks for a conversation on developing a better method. These statements reflect an on-going disagreement expressed over many years about the IPO pricing process.

The underwriters’ balancing of interests of the issuer and the need to price in some relation to the intrinsic value of the company in the interests of their customers has worked effectively for many years except when the underwriters have decided to game the distribution process or the aftermarket. In my experience, the regulation of IPO pricing is a difficult matter and it is better that the regulators limit their involvement to oversight for possible manipulation of the distribution process and the aftermarket as well as ensuring appropriate disclosures. FINRA’s predecessor, NASD, requested comment in 2003 on recommendations of the NYSE/NASD IPO Advisory Committee on three possible alternative approaches to promote transparency in pricing offerings, including whether to use an auction system–which is an oft-mentioned alternative.

What was not mentioned in the discussions of the LinkedIn IPO pricing was the responsibilities of the LinkedIn board of directors for that pricing, since the general view is that the issuer will accept the pricing determinations of the underwriters. However, this is where a new FINRA rule will likely make changes. Instead of proposing rules to adopt any of the alternative pricing methods, FINRA recently implemented new FINRA Rule 5131, which (among other things) requires that underwriters provide the IPO issuer’s pricing committee or board of directors with a regular report of indications of interest in order to assist the issuer to make an informed decision as to the pricing of the offering. As stated by the NASD in 2003, “. . . greater participation by issuers in pricing and allocation decisions would better ensure that those decisions are consistent with the fiduciary duty of directors and management, and would provide management with more information to evaluate the underwriter’s performance.” Clearly, it was FINRA’s intention to enhance the corporate governance responsibilities of issuers in the setting of the IPO price for the company.

We shall see whether the new rule, which became effective at the end of May, will have an impact on IPO pricing. In any event, any future discussions of the IPO pricing issue will have to take into account the fact that the issuer’s board of directors was part of an informed decision on the final pricing determination.

Supreme Court Rules Loss Causation Need Not Be Proven at Class Certification Stage

In the midst of my computer meltdown last week, the US Supreme Court held that securities fraud plaintiffs need not prove loss causation at the class certification stage in Erica P. John Fund v. Halliburton. We have been posting memos on this decision in our “Securities Litigation” Practice Area.

– Broc Romanek