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Originally posted by zf0enix
Also, what about the apparent conflict of interests with Underwriters, analysts, brokers in the major brokarages (e.g. Morgan Stanley Dean Witter, or what ever it's called now). I know in the accounting/auditing/consulting world it's a big issue. But, it seems even more dangerous in an arena where so much money is made by the underwriters and the same company values the stock and promotes it to their clients.
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No question it's a conflict of interest. The average Joe, though, doesn't need to worry about it, since you've got a snowball's chance in hell of being called about getting in on a good IPO. Really, the problem for most folks is that the bankers and brokers conspire to make sure that the big customers get the best issues. The ones who end up paying the price are the companies. Say company XYZ issues stock for the first time. The underwriter needs to determine the offer price on the primary market. He values XYZ at 10, and the brokers sell it to their big clients that way. Over the course of the day the price goes up to 15 and the clients unload it. Basically the underwriter just gave 5 bucks a share to the insiders, 5 bucks that should have gone to the company XYZ raising capital. The problem is that unlike the sort of analysis-broker-banker schemes, this is hard to prove. The brokers are charged with selling the stock at the price at which it's valued. It's not up to them to figure out the right price. Really, you could charge the underwriters with incompetence, but that's about it.
Bob