Updated from 10:23 a.m. EDTAbout 300 companies whose shares were allegedly manipulated during the IPO craze settled with investors for $1 billion Thursday, but plaintiffs' lawyers say the deal is just the first step toward a much bigger payday. Because of the way it's structured, the tentative deal with 309 companies represents only a guarantee if plaintiffs can't collect from their real quarry: 55 Wall Street firms that underwrote and marketed the deals. "We've always been of the mindset that the primary targets are the underwriting community,'' said Melvyn Weiss, a partner with Milberg Weiss Bershad Hynes & Lerach, the big class-action firm heading up the phalanx of law firms bringing the litigation. "The issuers are on the bottom of the ladder of wrongdoing.'' The lawsuit alleges that every major Wall Street investment bank, including Goldman Sachs ( GS), Citigroup ( C) and Merrill Lynch ( MER), conspired with more than 300 start-ups -- overwhelmingly Internet companies -- to manipulate the IPO market during the bull market. The suit contends the investment banks defrauded investors by artificially inflating the value of dot-com IPOs for companies such as Ask Jeeves, iVillage, Razorfish and theGlobe.com, publishing bullish reports to prop up those stocks and striking deals with institutional investors to encourage them to buy shares of those companies in the aftermarket. The litigation is a massive one involving nearly a thousand corporate and individual defendants. TheStreet.com ( TSCM), which publishes this Web site, was also part of the settlement. Much remains to be worked out in the proposed deal before it will be submitted to the court for approval. But the lawyers said they've reached an agreement in principle with the 309 companies, their officers and directors and their insurers to settle the first phase of the case. Under the deal, about 40 insurers would pay $1 billion to the plaintiffs and their lawyers. But in doing so, the companies are assigning any legal claims they may have against the Wall Street firms to the plaintiffs. In addition, if the plaintiff lawyer obtains either a judgment or settlement greater than $1 billion from the Wall Street banks, the insurers wouldn't owe a cent. In other words, the $1 billion is a minimum guaranteed payment to the plaintiffs. And to help the plaintiffs put the squeeze on Wall Street, the companies and their officers have entered into a cooperation agreement with the plaintiffs' lawyers.
The deal in the IPO allocation case comes just months after 10 Wall Street firms paid $1.4 billion in fines and fees to resolve last year's long investigation in tainted stock research. At the same time, a number of leading financial firms that have been sued by Enron's shareholders are trying to resolve that multibillion-dollar lawsuit in court-ordered mediation. Lawyers from Milberg Weiss represent the litigants in that lawsuit, too. Settlement talks with the dot-com companies heated up this winter, after a federal judge in February gave the plaintiffs the green light to begin discovery in the case -- subpoena documents and take testimony. U.S. District Judge Shira Scheindlin opened the door to that document dump after denying, in part, a motion to dismiss the lawsuit. But the lawyers said the companies had been negotiating for more than a year. In fact, they were involved in mediation with a former federal judge, just like the kind of mediation now taking place in the Enron litigation. "The amount of money at issue here is such that I don't think anyone is going to want to go to trial. It's ripe for a settlement," said Donald Langevoort, a securities law professor at Georgetown University School of Law. "But this is only one of a number of threats to the Wall Street firms. They have to keep an eye on all their potential exposures in talking about settling any one of them." Weiss declined to comment on whether the plaintiffs were engaged in settlement talks with the Wall Street firms. But he said discovery had begun and "documents were flowing in'' from the securities firms. The lawyers also said it was premature to talk about how much of a fee they might get. Usually, plaintiff lawyers in class-action cases can keep up to one-third of a settlement as legal fees. In fact, the court has yet to decide just how big the class of injured investors is. That process will begin shortly, and it could involve millions of people.