Blank-Check Bankers Have a Spotty Past

A Long Island investment firm has carved out a niche finding money for dreams before they are dreamt.

EarlyBirdCapital is leading a revival in so-called blank-check IPOs, stock offerings filed by fledgling start-ups whose sole reason for existence is to buy a business they have yet to identify.

This year alone, the Melville, N.Y., firm has been the lead underwriter or co-manager on half of the two dozen blank-check initial public offerings that are awaiting approval from the Securities and Exchange Commission. Of the eight blank-check stock deals that have priced and begun trading this year, EarlyBirdCapital has been the investment banker behind four of them, raising $160 million in the process.

Other little-known investment banks such as Broadband Capital Management, Maxim Group and Morgan Joseph also are getting into the game of underwriting these business strategies-in-waiting.

But none has come to dominate the market like EarlyBirdCapital, a securities firm that's led by executives with a long history of fashioning blank-check deals.

David Nussbaum, EarlyBirdCapital's chairman, and Steven Levine, the firm's chief executive, both hail from GKN Securities, a defunct brokerage that tried to make a name for itself by underwriting blank-check IPOs. The firm ran into problems with securities regulators in the 1990s.

In the mid-1990s, GKN managed about a dozen blank-check IPOs, which the firm calls "specified purpose acquisition companies," or SPAC. GKN even applied in 1992 to trademark the name. In all, the deals raised about $140 million and a good number of the GKN blank checks found merger partners with small companies.

But GKN's monopoly in blank checks came to a crashing halt when in 1997 the NASD ordered the firm and 29 brokers and supervisors to pay more than $2 million in fines and restitution to settle allegations it had overcharged investors buying shares in eight newly minted stocks. The regulators alleged that GKN had excessive markups on the shares because it essentially controlled their post-IPO trading.

Some of the stocks GKN allegedly gouged investors on were the same blank-check companies it had taken public.

In conjunction with the NASD regulatory action, Nussbaum, who was GKN's chairman and CEO, was fined $50,000 and suspended from the brokerage business for 30 days. Roger Gladstone, GKN's president, also was fined $50,000 and suspended for 30 days. Gladstone also now works at EarlyBird.

In the wake of GKN's troubles, the bursting of the bubble in tech stocks and the three-year bear market, blank-check IPOs all but disappeared. Now they're back, in large part due to the efforts of EarlyBirdCapital. The investment firm, which employs other GKN alums, even has gone back to calling its blank-check deals SPACs.

Nussbaum dismisses the regulatory problems at GKN as ancient history and says it should have no bearing on EarlyBirdCapital and its attempt to revive blank checks as an investment vehicle. He says the regulatory violations at GKN involved post-IPO trading, and EarlyBirdCapital doesn't make a market in the stocks of companies it takes public.