IPO Probe of Wall Street Ties Tony Bruan to Investment Banks
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July 9, 2001
by Philip Boroff
New York, (Bloomberg) — Anthony “Tony” Bruan and his traders at PTJP Partners LP succeeded where millions of investors failed during the dot-com boom of 1999 and 2000. All they needed was extra cash to persuade Wall Street investment banks to let them buy the most sought-after initial public offerings before everyone else.
In return, brokers at the securities firms that took the companies public demanded, or expected, a payback for allowing an investor to buy IPO shares, the traders said. For PTJP and the IPO underwriters, it was a great way to make money in the greatest bull market, as the Nasdaq Composite Index rallied 460 percent in the five years through March 1, 2000.
“I can’t say whether it was illegal but it certainly was unethical,” said Sam Hayes, a Harvard Business School finance professor and author of seven books on capital markets. “It undermines investor confidence because they were giving special preference to certain investors for a kickback. And that’s what it was, a kickback.”
And that’s why Bruan, a white-haired 57-year-old with a ripple or two of muscle on his 6-foot-3-inch frame, finds himself at the center of a federal investigation of IPOs led by the Securities and Exchange Commission and the U.S. Attorney in Manhattan. At least nine of Wall Street’s largest securities firms have received subpoenas or requests for information in an industrywide probe that may determine whether the firms violated the law by receiving cash payments disguised as commission income in return for a piece of the next hot IPO.
High Commissions
Some brokers at the big investment banks asked PTJP traders to pay commissions as much as eight times the customary rate on unrelated trades or to buy shares in secondary stock offerings for which there was far less demand, according to five former traders at PTJP and Worldco LLC, a brokerage run by the Bruan family. They spoke on the condition that they wouldn’t be identified.
Brokers also granted IPO allocations after ensuring that traders would later purchase additional shares, the PTJP traders said. That practice is barred by regulators because it can artificially inflate stock prices. One of the traders said he thought he had to generate enough business to return as much as half the profits reaped on IPOs to the investment banks. Bruan, who has been a cooperating witness in the probe, may help investigators determine whether IPO underwriters violated securities laws.
Wrongdoing Denied
Harvey Goldschmid, former general counsel to the SEC and now a professor of law at Columbia University, said he worries “about the manipulative aspect” of agreements to buy IPOs once they’ve begun trading. “If you agree to buy shares in the aftermarket, it may influence the price of the stock” and could be considered a violation of U.S. securities law, he said.
The banks, including Credit Suisse First Boston Inc., Lehman Brothers Holdings Inc., Morgan Stanley Dean Witter & Co., and J.P. Morgan Chase & Co., have denied wrongdoing or said they are cooperating with the investigation. CSFB late last month fired three brokers who had a say in awarding IPO shares, for what the firm said were violations of its policies. Four firms — Morgan Stanley, CSFB, Goldman Sachs Group Inc. and Bear Stearns Cos. — served as the lead underwriters on the IPOs named by the PTJP traders. Spokesmen for the firms declined to comment. In all, 16 securities firms were involved in the offerings.
Convicted Felons
In contrast to the burnished-wood-paneled quarters of Wall Street’s biggest trading and investment firms, Bruan’s company of more than 60 traders worked in an office where tiles dangled from the ceiling and the remnants of fast food littered many of the desks, each with a computer that could be shared by as many as three traders. It wasn’t uncommon for some trades to move through businesses set up to conceal the identity of the firm. The practice included the use of U.S. Postal Service boxes in Midwestern states, a PTJP trader said.
Some of Bruan’s traders were recent college graduates. Others had experience managing millions of dollars for hedge fund investors. In 1999, four were convicted or accused felons, including Joseph Teseo, 32, and Philip Teseo, 29, who pleaded guilty that year in a scheme to manipulate IPOs.
Bruan’s brother-in-law Christopher Carajohn said he used PTJP’s office in the firm’s early years as a base for trading. Carajohn is a former director of a London commodities company and was convicted in the U.K. in 1987 of a 2 million-pound swindle.
Strategy the Key
What PTJP lacked in prestige, Bruan made up for in strategy. Over the course of more than 25 years on Wall Street, he emphasized generating commissions to build connections with people who could reciprocate with market-moving information or deals. When the IPO craze exploded, investment banks were willing to accommodate, PTJP traders said.
One trader said Walter Scott Bruan, who is Bruan’s nephew and a PTJP director, boasted that the firm pulled in $10 million in the VA Linux IPO. Another person said PTJP amassed at least 50,000 shares in Red Hat, the top U.S. distributor of the free Linux computer operating system. Red Hat shares rose to more than $28 from $7 when trading started on Aug. 11, 1999.
Bruan was asked twice for an interview outside his waterfront home, a brick colonial valued at $1.8 million in Atlantic Beach, New York, where he docks his boat, “The Speculator.” On one occasion, he was dressed in a chocolate brown suit and paisley bow tie; on another, he wore a blue silk suit and dark blue tie.
“I can’t comment on the investigation or anything else,” Bruan said, after stepping from a 1999 Bentley parked beside a Mercedes-Benz sedan and a Jaguar coupe. Bruan’s lawyer, Michael Trager, also declined to comment.
Wall Street Career
Vincent Calcagno, PTJP’s chief financial officer, issued a statement in May, when Bruan was named in news reports as cooperating with the federal investigation. He said PTJP “is committed to fair and honest financial practices in every transaction it undertakes” and “holds itself to the highest ethical standard.”
“To the extent that PTJP received allocations of initial public offerings, it did so consistent with longstanding industry practices,” Calcagno said.
Friends described Bruan as a generous man who over the years enjoyed playing tennis in the Hamptons and showing off his ability to do push-ups. In the office, associates said, he was all business as he monitored his traders’ moves from a computer terminal on his desk. A bad trade could trigger a verbal assault.
Raised in Brooklyn
Bruan was raised in the 1950s in the Midwood neighborhood of Brooklyn, New York, a middle- and working-class community with its share of rough edges. In Artie’s Pool Hall, where Bruan hung out, he was not Anthony but Tony, the name he still goes by. Friends said he was quick and talented with his fists, a trait he demonstrated a dozen years ago when he intervened to protect two Hasidic Jewish boys being beaten by a group of teen-agers in Lawrence, Long Island.
Bruan’s friends from Midwood include Howard Sirota, a New York securities lawyer who has filed a series of suits against investment banks charging them with manipulating the award of IPOs, and Tony Sirico, who plays Paulie Walnuts on the HBO television series “The Sopranos.” Sirico declined an interview request. Sirota, who remains close to Bruan, declined to comment.
Some of Bruan’s friends described him as a high school dropout. He has told others that he completed a few college courses before following his older brother Peter to Wall Street.
Family Businesses
Peter worked at the New York Stock Exchange and Anthony as a floor broker at the American Stock Exchange. They were partners in the early 1970s in Oppenheimer & Co., which was later acquired by CIBC World Markets. By 1976, the brothers had their own brokerage, Bruan, Gordon & Co. Their partner was Allan Gordon, now a Broadway producer of shows such as “Rent” and “Death of a Salesman.” Gordon didn’t return telephone calls seeking an interview.
Working on the floor of the NYSE, the Bruans often arranged trades between major securities firms, specializing in orders of 25,000 to 50,000 shares and using private lines to the Street’s top trading desks, said Bill Higgins, an exchange floor broker from 1974 to 1994.
“If you were wired to eight or 10 of the largest firms, you could be the clearinghouse for large orders,” Higgins said. The Bruans “were good enough to bag top accounts and everyone else fell in line.”
John Lipuma, a tax adviser to the Bruans in the 1980s, said pension funds and other large investors came to the Bruans when they didn’t want the market to know they were buying stocks. According to Lipuma, the Bruans stepped in and bought shares in small lots, selling them at a profit to the major buyers.
In 1993, Bruan and family members started two businesses that came to anchor a network of firms based at 110 Wall Street: PTJP and Worldco.
Day Trading
Worldco, a licensed broker-dealer, was founded to execute trades for PTJP and other Bruan entities. In 1995, Worldco expanded into day trading, a style of investing in which individuals rarely hold stocks and bonds overnight. By 2000, Worldco was one of Wall Street’s largest day-trading operations, employing more than 400 traders and generating what the company’s Web site said was a daily volume that ranged from $600 million to $1.2 billion.
Its traders typically deposited funds with Worldco and then bought and sold with larger amounts extended by the firm.
Worldco made money primarily by sharing in traders’ profits and clearing their trades for commissions of as little as 1 cent a share, according to the Web sites.
“I’d say they had a cash cow,” said Simon Roffe, who was a Worldco day trader from November 1998 until March 1999.
Enforcement Action
Worldco is controlled by Waterford Holdings LLC, which is owned by Peter Bruan, Anthony Bruan’s son Walter Francis Bruan, and John G. Miller, Worldco’s chief executive officer, according to a March regulatory filing.
The firm disclosed in September that the enforcement arm of the National Association of Securities Dealers arm had preliminarily determined that Worldco, one of its officers and some traders had violated rules governing trading in derivatives. Worldco also reported that the NASD was reviewing its handling of a customer’s day-trading account.
PTJP describes itself as a hedge fund, a type of investment vehicle that falls outside regulations governing mutual funds, investment advisers and broker-dealers. Hedge funds are free to trade in IPO shares and aren’t barred from employing felons.
A PTJP brochure described Bruan as the firm’s “owner, head trader and manager” and as “one of the most famous intraday traders on Wall Street.” It said the firm had a “risk averse fast money” approach to investing.
Traders had a variety of relationships with PTJP. Under one arrangement, they deposited $25,000 to $30,000 and then bought and sold millions of dollars of shares with funds extended by PTJP. Most didn’t hold investments overnight. Gains were divided between traders and the firm. If losses mounted, traders were dismissed.
Guilty Pleas
Having a questionable, even criminal, record wasn’t a bar to becoming a PTJP trader. In 1999, PTJP’s traders included the Teseo brothers along with Dominick Flora, 45, and Steven Rosenblueth, 31. The Teseos were accused of inflating the price of initial public offerings in small companies while working at Duke & Co., a now defunct brokerage, and pleaded guilty in New York State court to attempted racketeering. Rosenblueth has been charged in the same case and is awaiting trial.
Flora pleaded guilty in federal court in New York in 1997 to receiving $28,000 in kickbacks from a brokerage called Oakford Corp. for trading through Oakford while he was employed as a trader at Gordon Haskett Capital Corp.
SEC Fines
Christopher Colgan was also a PTJP trader. He paid a $30,000 fine to the SEC in 1999 for helping a New Jersey brokerage, Charles Schwab Corp.’s Mayer & Schweitzer, manipulate stock prices. The brokerage, now called Schwab Capital Markets LP, paid a $585,000 civil penalty. Schwab spokeswoman Marta von Loewenfeldt declined to comment.
The firm’s ranks also included brothers Christopher and Tom Giarraputo. In 1996, their father, Leonard Giarraputo, resigned from Paine Webber Inc. while that firm was reviewing “his communications with relatives employed as traders at another securities firm,” according to a regulatory filing. Worldco subsequently employed Leonard Giarraputo as director of an office in Melville, Long Island.
The Teseos, Flora, Rosenblueth, Colgan, Leonard Giarraputo and Christopher Giarraputo declined to comment. Tom Giarraputo didn’t return telephone calls seeking an interview.
Whether they had criminal records or spotless backgrounds, traders were encouraged to build connections with people who could alert them to market-moving developments, such as an analyst’s ratings change on a stock.
Longtime Effort
The PTJP brochure recommended that traders engage in “heavy after-hours socializing three to four times per week.” It also pointed to the value in placing buy and sell orders that generated commissions, stating, “The fund has over 200 institutional accounts and ninety `direct wires’ with whom it trades `order flow’ and `research calls.”’
“The fund is extremely active in the IPO segment,” said the brochure, which also called Bruan “one of Wall Street’s largest private commission-paying clients.”
PTJP and the Bruan family’s Lawrence Group estimated that they would pay $43 million in commissions to brokerages in 1999, according to a PTJP memo.
“A certain amount of these commissions are needed to sustain relationships with various brokers,” Bruan’s son Walter Francis Bruan wrote in the memo.
Dot-com Bonanza
Anthony Bruan began focusing on using commissions to win IPO shares well before the dot-com craze, according to a lawsuit filed against Worldco in 1997.
Kenneth Laub, who was one of New York’s biggest commercial property brokers during the 1980s, said he shifted his money in 1995 from Bear Stearns, where then-Chairman Alan “Ace” Greenberg handled his account, to Worldco. He said he did so at the urging of the Bruan brothers and John Faessel, who had campaigned to become Laub’s financial adviser.
The sales pitch included a memo drafted by Peter Bruan explaining how Laub could gain IPO shares.
“To obtain sizable allocations in the IPO and secondary market, you will have to focus on generating commissions at the firms who are bringing the deals you want,” Peter Bruan wrote.
`Using His Wealth’
During a nine-month period, Laub alleged in the lawsuit, Faessel and Anthony Bruan advised him to trade at a rate “4 to 5 times greater than” he had at Bear Stearns. Laub figured his Worldco volume hit $600 million, produced more than $1 million in commissions, and resulted in at least $40 million in losses.
A Manhattan federal court judge dismissed the case. Laub refiled it in New York State Supreme Court in 1998. In May, he asked permission to add the Bruans as defendants and expand his claims to encompass allegations about their IPO practices.
Laub accused the Bruans of “using his wealth” to buy them an “`in’ to IPOs.” He said the “modus operandi” of Worldco was “spreading commission dollars around on the Street to gain privileged access to market information and participation rights in IPOs.”
Worldco denied Laub’s allegations, arguing that he actually made more than $20 million profit by trading with the firm. Faessel declined to comment.
Laub is represented by David Boies, who served as former Vice President Al Gore’s lawyer in his unsuccessful bid to overturn the results of last year’s U.S. presidential election in Florida. Boies said in a statement, “We are aware that government regulators are looking into the business practices of PTJP and the Bruans. We are also actively investigating some of these practices, as they relate to the claims alleged in our lawsuit.”
Scramble
The IPO frenzy began in earnest in November 1998, when shares of Theglobe.com, a company that allows Internet users to set up their own home pages, surged more than sevenfold on the first day they were traded. Investment banks soon brought hundreds of companies to market. They set a price for the IPO shares, sold them to selected buyers and released them for public trading that almost invariably drove up the price. Millions of investors jockeyed to be among the chosen.
PTJP traders drew on contacts at investment banks or, in a variation of the Wall Street mating dance, they cold-called the banks, seeking to enlist so-called institutional brokers to service their accounts and barter commissions for IPOs. They also targeted brokers who worked with wealthy individuals.
One trader recounted getting more than 7,500 shares in Internet music distributor MP3.com. Credit Suisse First Boston arranged the offering, selling an 18 percent stake in the San Diego-based company in July 1999.
Paying Back Profits
The trader said he had longstanding relationships with CSFB brokers that were cemented by his willingness to return a quarter to half his IPO profits to them in the form of commissions, a practice he followed with other banks as well.
The trader said he was regularly solicited by the brokers to buy shares in secondary offerings, the sale of blocks of stocks in companies that have already gone public. The banks earn fees from the companies selling the shares.
The secondary offerings were less desirable than IPOs because they didn’t offer the potential for large, immediate gains. The trader said he bought shares in numerous secondary offerings, choosing those he thought were the best investments.
As the MP3.com IPO approached, the trader said he requested as many as 50,000 shares and was satisfied with the 7,500-plus allocation he got. His shares valued at $28 jumped to $92 when trading began, peaked at $105 that day and closed at $63.31. He said he generally sold IPO shares at their opening price.
IPO Score
Another trader described winning shares in the VA Linux, Corvis and CacheFlow IPOs by cultivating relationships with brokers who had a voice in IPO allocations. The trader paid commissions of as much as 12 cents a share — double the normal rate — and agreed to buy shares in any secondary offering that brokers were selling. Without those purchases, the trader said, the brokers would have cut off access to IPOs. The trader declined to identify the brokers.
PTJP traders said it was common for brokers to point out that investors were willing to pay commissions of 50 cents a share or more on trades. Often, brokers also asked how many additional shares the traders would buy after trading began, the traders said. One trader said a broker denied him a large allocation of shares because he hadn’t purchased enough of these “aftermarket” shares in previous IPOs.
Legal Questions
Legal experts said it would likely be illegal for brokers to demand part of the profits or high commissions in exchange for IPO shares. Without such a demand, the experts said, it would probably be legal for a broker to sell IPO shares to a high-revenue customer even if the customer’s intent in doing business was to win IPO shares.
“Is the underwriter being separately compensated for underwriting decisions?” asked Larry Hamermesh, a law professor at Widener University in Chester, Pennsylvania. “That’s the question: Is there a side agreement or not?”
Time has been cruel to most of the Internet- and computer- related companies that went public in 1999 and 2000, showering huge, immediate gains on those investors who had the connections or luck to buy IPO shares. Many investors suffered as prices collapsed. Shares in VA Linux and CacheFlow, which peaked at $320 and $182, respectively, closed Friday at less than $5. So did shares in Red Hat, Corvis and MP3.com.
Shares in Theglobe.com, which launched the IPO frenzy, hit $48.50 on Nov. 13, 1998, the day they began trading. On Friday, they fell 1 cent and closed at 20 cents.
