“The Securities and Exchange Commission, expanding a probe into alleged IPO abuses, has signaled to Morgan Stanley that it may file civil charges alleging the securities firm doled out shares to investors based partly on their commitments to buy additional stock after trading began, people familiar with the matter say,” writes Randall Smith in today’s Wall Street Journal.

“The SEC staff has informally indicated to Morgan Stanley that it plans to send a so-called Wells notice notifying the firm of the planned charges, the people said. The development suggests the SEC’s investigation into such “laddering” of stock sold in initial public offerings could be heating up. The probe is one of the last major regulatory crackdowns on Wall Street excesses that characterized the 1990s stock-market bubble.”

“A dozen Wall Street firms have agreed to pay more than $1.5 billion to settle charges by regulators led by the New York Attorney General that their analysts’ research reports were at times overly bullish in an effort to win investment-banking business. And the Credit Suisse First Boston unit of Credit Suisse Group agreed a year ago to pay $100 million to settle charges that it improperly shared IPO profits with customers by getting them to pay oversized commissions on other trades in exchange for access to hot IPOs.”

“In the laddering investigation, the SEC staff this past fall notified Goldman Sachs Group Inc. and the J.P. Morgan unit of J.P. Morgan Chase & Co., that it planned to recommend filing civil securities-fraud and market-manipulation charges. Goldman and J.P. Morgan have denied wrongdoing, and no charges have been filed. Morgan Stanley also has denied wrongdoing to the regulators, said one person familiar with the talks.”

“The investigation has significance for investors. Steering hot IPOs to big investors who signaled plans to buy additional shares, stock traders say, could have stimulated additional demand for technology stocks during the stock-market bubble, contributing to the huge first-day price gains that eventually worsened losses suffered by small investors who — lacking access to the actual IPOs — bought on the open market after trading began.”

“If proven, the regulatory allegations ‘would show a deliberate attempt to manipulate the market in a manner that really injures the ordinary investor who buys in the secondary market at the top of the market,’ says John Coffee, a Columbia law school professor in New York. While difficult to prove, Mr. Coffee said, sanctions against such conduct ‘would protect an always vulnerable, but critical, market from real abuse.’ “

“The SEC probe is being watched by attorneys for such investors, who have brought a large case against 55 underwriters and 307 companies that issued stock in IPOs; the suit is pending in federal court in Manhattan. Judge Shira Scheindlin last week denied a motion to dismiss the case by the securities firms, which should eventually give the plaintiffs’ lawyers access to internal Wall Street documents on the matter. Goldman and Morgan ranked Nos. 1 and 2, respectively, in IPO volume during the bubble era of 1999-2000.”