U.S. antitrust authorities have begun an investigation into possible anticompetitive practices among underwriters of initial public offerings.
More than two dozen securities firms are said to be included in the Department of Justice probe, including Wall Street luminaries Goldman, Sachs & Co. and Lehman Brothers Inc.
The investigation was sparked by investor class actions filed last year, according to a Goldman Sachs filing last week with the Securities and Exchange Commission.
At the heart of the complaints is the charge that underwriters have conspired to fix their IPO fees at 7%-particularly for issues in the $20 million to $80 million range-according to plaintiffs in the lawsuits filed in U.S. District Court for the Southern District of New York.
Many securities industry insiders acknowledge that there tended to be more variation in these fees as recently as five years ago.
"The Justice Department is looking at the possibility of anticompetitive practices in underwriting services for initial public offerings," said Gina Talamona, spokeswoman for the department's antitrust division.
She would not say how many firms are being targeted. But the department appears to be casting its net beyond the class-action defendants; more than two dozen firms are in its sights, sources said. Some firms have not received subpoenas, but sources said most of the big firms will eventually be served.
"To my knowledge, this would be the first industrywide suit charging that investment banks are in collusion since U.S. v. Morgan" in the 1940s, said Samuel Hayes 3d, a Harvard finance professor.
But Mr. Hayes said the industry is very different than it was half a century ago, when that investigation was launched.
"The industry overall is much more competitive than it was in the 1940s," Mr. Hayes said. "But the uniformity of IPO gross spreads would suggest that this area of the industry is less competitive."
Mr. Hayes added that IPO underwriting is a difficult area in which to compete on price because it is so vital to a company's future.
Many in the financial services industry were surprised by the Justice Department probe. But one source said he had been expecting something like this for some time.
"When I was deposed by the NASD last year, I had the feeling that regulators were fishing around," the source said, comparing this investigation to last year's probe of secondary stock trading by the National Association of Securities Dealers, a securities industry self- regulator.
Another market source agreed that equity IPO underwriting spreads have narrowed in the past five years, to around 7%.
But the source said companies going public today are getting more for their money. "There are more underwriters on a deal and more research analysts and market makers following the company after the issue," the source said.
The Justice Department served a civil investigation demand Thursday on Goldman, Sachs & Co., according to an SEC filing Goldman made public Friday in preparation for its own IPO, which is expected this week.
Separately, Salomon Smith Barney spokeswoman Arda Nazarian and Lehman Brothers spokesman Chris Cosentino confirmed that their firms had been served last week with subpoenas related to this investigation.