Blank-Check IPOs Probed

Securities regulators are investigating trading in shares of so-called blank-check IPOs, which are stock deals done by companies in search of a business plan.

The NASD investigation is focusing on some of the investment banks that have been underwriting these somewhat unusual initial public offerings, sources say. The inquiry, which began last year, is in its early stages.

Sources say one investment firm drawing particular scrutiny is EarlyBirdCapital, a New York firm that has been either the lead underwriter or co-manager on about half of the 47 blank-check initial offerings to come to market the past three years. More than any other investment bank, EarlyBird is credited with breathing new life into blank-check IPOs, after the stock offerings fell out of favor in the late 1990s.

In the case of EarlyBird, regulators have begun gathering email correspondence between some of the firm's employees and investors in blank-check deals, say people familiar with the inquiry.

An NASD spokesman could not be reached for comment. EarlyBird issued a statement Monday saying, "We have received an inquiry from the NASD and are cooperating fully.''

The regulatory investigation comes at a time that blank-check IPOs have become all the rage on Wall Street, especially among hedge funds with money to burn. Investors who buy into blank checks are in effect betting on the resumes of the managers and their ability to find suitable businesses to acquire.

Over the past three years, investors have sunk more than $2 billion into blank-check IPOs. But so far, only a handful of those blank-check companies have completed a merger with an actual business. That includes last week's tentative $265 million deal between blank-check company Services Acquisition Corp. International(SVI Quote) and Jamba Juice, a San Francisco-based chain of smoothie beverage stores.