As Levitt Lectures About IPO Dangers, VA Linux Skyrockets

The SEC chairman's town meeting focused on new-issue pitfalls.
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Americans may be smitten by the romanticism of stock trading, but

Securities and Exchange Commission

Chairman

Arthur Levitt

warned Thursday that one of the biggest financial dangers they should avoid has three letters: I-P-O.

Levitt issued the warning at

Columbia University

while 8 miles south near Wall Street, yet another IPO,

VA Linux

, was shooting skyward, selling at more than 700% of its initial offering price by midday.

Many individual investors in securities markets have neither the experience nor the information to navigate the complexities of volatile IPOs, Levitt told several hundred people gathered in Manhattan.

"I'm very concerned about the way IPOs are being bought by America's investors," he said. "More of them sell down than sell up. That is risky business. I don't think anybody is smart enough to know when to get out."

Levitt also cautioned investors against counting on the SEC to eliminate the risks of the markets. "We simply cannot protect people from their own foolishness," he said.

Levitt was joined in his address by U.S. Sen.

Charles Schumer

, D-New York, who said that the fact that half of all Americans now own equities was "utterly amazing," particularly because many entered the markets as investors for the first time only in the last three years.

"That's a good thing. But it also means that millions of investors are novices," he said.

Sounding sometimes financially sage, sometimes grandfatherly as he paced across the stage, the white-haired, 68-year-old Levitt said the average investor doesn't understand the mechanics of an IPO.

Unbeknownst to an individual, institutional investors may be buying and selling, or "flipping" shares of a new stock issue, and driving its price, Levitt said.

"Be careful," he said of playing new offerings. "It's a short-term game."

Levitt said Americans have been lured into the markets by the romance of trading, as it's been portrayed on television and in movies. When an investor sits down at a computer screen, he or she suddenly feels like a trader, he said.

"We have, in our society, glorified the trader," Levitt said. "You don't have the experience. You don't have the knowledge. And you don't have the resources that a trader has."