Banks Said to Alter IPO Pitches as Finra Faults New Conflicts

Nov. 13 (Bloomberg) — Wall Street is changing the way it pitches for initial public offerings as it prepares to settle with regulators, people with knowledge of the matter said, following claims analysts inflated estimates to win business for their banks.

The settlement with the Financial Industry Regulatory Authority, or Finra, which may be announced next month, would focus on meetings between analysts and companies ahead of their IPOs, said the people, who asked not to be identified because the information is private. At least seven banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., may be asked to pay a fine of about $50 million collectively as part of an agreement, the people said.

Issuers typically interview analysts to get a sense of how investors might value the company ahead of going public. While bankers and analysts are required to be in separate meetings, investigators are concerned the research side may still feel pressure to inflate its valuation estimates to help the bankers at its firm win business, the people said.

Banks may change their own rules and standards this month, before a settlement is announced, the people said. One possibility is to require that only analysts ask questions of the issuers’ management team, not the other way around, they said. That conversation could be logged, so that there’s a record of the topics discussed, they said.

Dot-Com Conflicts

The investigation is reminiscent of the dot-com era. In April 2003, 10 firms agreed to pay $1.4 billion including penalties after being accused of using biased research to gain lucrative underwriting assignments. That settlement shrunk the role of research analysts. Since then, analysts have been prohibited from overtly pitching for their firms to be hired; however, potential issuers can still interview them before deciding which firms will underwrite their IPOs.

Finra, the largest independent securities regulator in the U.S., has been investigating the interviewing process surrounding preparations for an IPO of Toys “R” Us Inc., the people said, which withdrew its filing last year. Analysts from the various banks were brought in to meet with Toys “R” Us and its sponsors, including KKR & Co., to discuss the firms’ earnings estimates, the people said.

A representative for Toys “R” Us didn’t immediately respond to a request for comment left after normal business hours. A spokeswoman for KKR declined to comment.

Goldman Sachs, JPMorgan, Bank of America Corp., Credit Suisse Group AG, Deutsche Bank AG, Citigroup Inc. and Wells Fargo & Co. were hired to work on the toy company’s IPO and may be subject to the fine, said the people.

“We cannot confirm the existence of enforcement investigations or related matters,” Nancy Condon, a spokeswoman for Finra, said in a statement.

Representatives for the banks declined to comment.

–With assistance from Michael J. Moore and Hugh Son in New York.

To contact the reporters on this story: Leslie Picker in New York at [e-mail]; Dakin Campbell in New York at [e-mail] To contact the editors responsible for this story: Mohammed Hadi at [e-mail]; Peter Eichenbaum at [e-mail] Elizabeth Wollman, David Scheer