Several divisional managers at Credit Suisse First Boston knew of and participated in a "pervasive" scheme to share customers' profits on hot new-stock issues in 1999 and 2000, securities regulators alleged.

In a widely watched settlement, which was expected, regulators yesterday charged that more than 100 CSFB customers, mostly hedge funds, were pressured to pay 35% to 65% of their profits from initial public offerings during the Internet stock boom of April 1999 to June 2000, when hot IPOs routinely doubled or tripled in price on their first day of trading.

"The scheme was pervasive. There were many parts of the firm involved," asserted Mary L. Schapiro, president of the regulatory unit of the National Association of Securities Dealers who detailed the case in a news conference with Steven Cutler, enforcement chief of the Securities and Exchange Commission.

The securities unit of Zurich's Credit Suisse Group settled the matter without admitting or denying the allegations, adding in a statement that the firm is taking disciplinary action against unspecified employees.

John Mack, who became CSFB's chief executive last July, said in the statement, "We are very pleased that our firm has reached a full resolution of this matter with regulatory authorities," achieving one of his top priorities.

Regulators said they are continuing to pursue an investigation into possible wrongdoing in the case against past and current CSFB employees. As part of the settlement, CSFB will pay $100 million, which includes disgorgement of an estimated $70 million in allegedly ill-gotten gains, according to regulators. The penalty and outlines of the settlement were reported last month in The Wall Street Journal.

During one quarter of 1999, Ms. Schapiro said, such illicit payments amounted to 22% of all the commissions the firm received. The "abusive practices" occurred in CSFB's stock capital-markets division, its brokerage operation that caters to wealthy individuals and hedge funds, and among brokers associated with the firm's technology banking group in San Francisco, the SEC's Mr. Cutler said.

"CSFB improperly took advantage of the hot IPO market and its underwriter position to take for itself a significant portion of its own customers' profits," Mr. Cutler said.

The technology-group brokers demanded the highest share of customers' IPO profits, regulators said, initially seeking 50%, and later 65%. Three brokers in the tech group were suspended and later terminated in connection with the case last year. The NASD's regulatory arm began its inquiry in May 2000 after receiving a letter describing some of the practices. The SEC began its own inquiry a few months later, in August 2000.

The SEC said CSFB violated the NASD's rule requiring firms to observe "high standards of commercial honor and just and equitable principles of trade," another NASD rule barring firms from sharing in customers' profits, as well as a federal securities law that requires firms to keep accurate records, in this case reflecting that the commissions represented a share of IPO profits. However, CSFB avoided a more serious fraud charge which could have hurt the firm's business more.

The regulators cited a series of e-mails in which CSFB brokers and managers discussed the requirements for customers to share their IPO profits. On Feb. 10, 2000, for example, a technology-group broker told a senior salesman in the same unit that he had spoken to a customer and "told him that he was very far behind on his commissions and that we expect a 65% return on all the money that we make him."

The SEC complaint stressed the role of senior executives, noting that CSFB supervisors "knew of the practices described in the complaint, encouraged many of the practices described in the complaint, and directed CSFB employees to urge customers to maintain specified ratios of commissions to IPO profit." In some cases, the complaint states, CSFB senior managers "personally engaged in some of the practices."

Credit: Staff Reporters of The Wall Street Journal