UNITED STATES DISTRICT COURT
DISTRICT OF COLUMBIA

Plaintiff Securities and Exchange Commission ("Commission") alleges as follows:

SUMMARY

1. From March 1999 through August 2000, defendant J.P. Morgan Securities Inc. ("JPMSI") provided allocations of stock to institutional customers ("customers") in hot Initial Public Offerings ("IPOs") it underwrote. JPMSI violated Rule 101 of Regulation M [17 C.F.R. § 242.101] under the Securities Exchange Act of 1934 ("Exchange Act") by attempting to induce certain customers to place orders for shares in the aftermarket for IPOs. JPMSI did in fact induce certain customers to place such orders. Such customers often purchased stock during the new issues' first few trading days.
    
2. Rule 101 of Regulation M, among other things, prohibits underwriters, during a restricted period prior to the completion of their participation in the distribution of IPO shares, from directly or indirectly bidding for, purchasing, or attempting to induce any person to bid for or purchase any offered security in the aftermarket. As a prophylactic rule, Regulation M is designed to prohibit activities that could artificially influence the market for the offered security, including for example, supporting the IPO price by creating the perception of scarcity of IPO stock or creating the perception of aftermarket demand
    
3. During the restricted period, JPMSI attempted to induce certain customers to make aftermarket purchases in violation of Rule 101 of Regulation M by engaging in the following activities. JPMSI solicited customers to provide information about whether and at what price and in what quantity they intended to place aftermarket orders for IPO stock. JPMSI communicated to certain customers that expressing an interest in buying shares in the aftermarket and/or aftermarket buying would help them obtain allocations of hot and oversubscribed IPOs. (An expression of interest in buying shares in the aftermarket is hereinafter referred to as "aftermarket interest.") JPMSI encouraged certain customers that had provided aftermarket interest to increase the prices they had told JPMSI they were willing to pay in the aftermarket. JPMSI solicited aftermarket interest from certain customers who JPMSI knew had no interest in owning stock of the IPO companies long term. In addition, JPMSI accepted and/or sought aftermarket interest from certain customers who said they intended to purchase an amount of shares in the aftermarket equal to the size of their IPO allocation ("1 for 1") or intended to purchase specific amounts of shares in the aftermarket that were pegged to different allocation amounts without any reference to a fixed total position size.
    
4. In a number of instances, JPMSI described certain customers' aftermarket interest as promises, obligations or commitments. In addition, after the IPO shares had been allocated and distributed, and at times before aftermarket trading began, JPMSI solicited aftermarket orders by making follow-up calls to customers who previously had indicated aftermarket interest. Further, once aftermarket trading began, JPMSI often tracked whether customers followed through on their aftermarket interest with purchases. When customers did not follow through, JPMSI encouraged its institutional sales force ("sales force") to make follow-up calls to solicit orders to purchase stock in accordance with the customers' aftermarket interest. This conduct, taken as a whole, demonstrates that when JPMSI previously had solicited aftermarket interest from these customers, it was attempting to induce customers to make aftermarket purchases in the first few days of trading in violation of Rule 101 of Regulation M.
    
5. JPMSI also violated Rule 101 of Regulation M in the Large Scale Biology IPO by soliciting for aftermarket orders from customers before all IPO shares had been distributed and rewarding one such customer for its aftermarket order by allocating it additional IPO shares.
    
6. In addition to its violations of Rule 101 of Regulation M, JPMSI persuaded one or more customers in July 1999 to accept an allocation of Biopure, a "cold" IPO (i.e., one where there is little interest in IPO shares) by promising the reward of an allocation of Interactive Pictures Corp. ("IPIX"), an upcoming oversubscribed IPO, (i.e., one where the demand for shares exceeds the supply of IPO shares). This conduct violated Conduct Rule 2110 of NASD Inc. ("NASD"), which requires member firms to observe high standards of commercial honor and just and equitable principles of trade.
    
7. JPMSI has engaged in, and unless enjoined, will continue to engage in, directly or indirectly, transactions, acts, practices, and courses of business that constitute violations of Rule 101 of Regulation M under the Exchange Act [17 C.F.R. § 242.101] and NASD Conduct Rule 2110.

NATURE OF THE PROCEEDINGS AND THE RELIEF SOUGHT

8. The Commission brings this action pursuant to authority conferred upon it by Sections 21(d), 21(e) and 21(f) of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78u(f)], to restrain and permanently enjoin JPMSI from violating Rule 101 of Regulation M and NASD Conduct Rule 2110. In addition, the Commission seeks other relief including, but not limited to, civil penalties.

JURISDICTION AND VENUE

9. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e), 21(f) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), 78u(f) and 78aa].
    
10. Venue lies in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa]. JPMSI is found and transacts business in this District.

DEFENDANT

11. J.P. Morgan Securities Inc. is a subsidiary of J.P. Morgan Chase & Co., a Delaware corporation with its principal place of business in New York, New York. JPMSI was registered during the relevant time period and continues to be registered with the Commission as a broker-dealer and is a member of NASD and the New York Stock Exchange, Inc., and is licensed to conduct securities business on a nationwide basis. JPMSI provides equity research, sales, trading services, merger and acquisition advisory services, private banking services, and underwriting services. The majority of the conduct described in this complaint occurred in JPMSI's New York, San Francisco and Chicago offices.

FACTS

The IPO Process at JPMSI

12. An IPO is the first public issuance of stock of a company that previously has not been publicly traded. A "hot" IPO is one in which the stock trades at a premium in the immediate aftermarket. An IPO is likely to be hot if it is well oversubscribed (i.e., the demand for IPO shares far exceeds the supply of IPO shares in the offering). During the period from March 1999 to August 2000, JPMSI was the lead underwriter for nine oversubscribed and hot IPOs: Rowecom; Valley Media; Genentech, Inc.; Hoover's Online; IPIX; Vicinity Corp.; The Medicines Company ("Medicines Company"); Dyax; and Large Scale Biology Corp.
     
13. Among the reasons that certain investors sought to obtain IPO stock was the large profit to be earned by flipping the shares if the IPO was hot. "Flipping" refers to the practice of investors selling IPO shares in the first few days of aftermarket trading, thereby realizing quick profits if the price has increased.
     
14. JPMSI's Equity Capital Markets ("ECM") department was responsible for the marketing and allocation of shares in IPOs. For approximately ten days prior to each IPO, members of the IPO company's management and ECM employees traveled around the country and gave roadshow presentations about the company to institutional investors. ECM employees also arranged individual meetings between institutional investors and the company's management. The syndicate desk, which was part of ECM, communicated information about upcoming IPOs to JPMSI's sales force through comments at morning research meetings that were broadcast to the sales force. The syndicate desk also allocated the IPO shares to customers.
     
15. JPMSI's sales force consisted of sales representatives who provided research to customers and offered securities, including IPOs to them, and sales traders who took orders for customers. Prior to each IPO, JPMSI's sales force obtained their customers "indications of interest" as to the number of shares desired by the customers in the IPO at the proposed price range and transmitted these indications to the syndicate desk to be entered into the institutional "pot book" for the IPO. The sales force discussed with customers whether they intended to flip or hold their IPO allocation. The sales force also obtained customers' aftermarket interest in the several days before the determination of the offering price.
     
16. The sales force often relayed to the syndicate desk this information obtained from customers, including the customers' aftermarket interest and sometimes also informed the syndicate desk of their customers' previous aftermarket purchases. The syndicate desk routinely entered customers' indications of interest in the IPO and aftermarket interest into the institutional pot book through the "syndesk" system, the computer database where all of the institutional indications of interest in the IPO and allocations were recorded. The syndicate desk also entered into the pot book customers' intentions to flip or hold their IPO shares.
     
17. On the night before an IPO, the syndicate desk and other members of ECM recommended to the company a price for the IPO and the company and JPMSI agreed on an IPO price. In addition, the syndicate desk made initial allocation decisions. On the morning of the IPO, but before aftermarket trading began, JPMSI sometimes adjusted and finalized allocation decisions. JPMSI then told customers their IPO allocations and asked them to confirm acceptance of the amount of shares they were allocated. When all the IPO shares were allocated, and all the customers had agreed to their IPO purchases, the distribution was complete. Thereafter, the syndicate desk would notify the sales representatives and sales traders that the deal was sold by announcing that "syndicate had broken."

JPMSI Solicited Certain Customers to Provide
Information About Whether and At What Price and In What Quantity
They Intended to Place Aftermarket Orders for IPO Stock

18. During the restricted period, i.e., prior to JPMSI's completion of participation in the distribution of IPO shares, JPMSI's sales force solicited aftermarket interest in oversubscribed IPOs from certain customers by asking customers who were submitting indications of interest in the IPO whether and at what price and in what quantity the customers intended to place aftermarket orders for IPO stock. In response, certain customers expressed an interest in buying an amount of shares in the aftermarket, often up to a certain price limit that was above the proposed IPO price range. These comments were noted in the institutional pot book (e.g., "aftermarket buyer one for one up to $22-$23"; "Will buy 1 for 1 in the aftermarket up to $25."). Some customers said they were willing to buy at any price in the aftermarket of oversubscribed IPOs (e.g., "Will buy 1 for 1 in aftermarket. No price sensitivity."; "First day will buy 25,000 to 50,000 with no price sensitivity"). Customers that were solicited for and provided this information often followed through by placing aftermarket orders and buying shares in the aftermarket in the first few days of trading.

JPMSI Communicated to Certain Customers
During the Restricted Period That Expressing an Interest in and
Buying Shares in the Aftermarket Would Help Them Obtain
Allocations of Oversubscribed, Hot IPOs

19. The aftermarket performance of JPMSI's IPOs was important to JPMSI. In an e-mail dated July 30, 1999, JPMSI's head of ECM noted to the CEO and the Chief Operating Officer that, in the case of the IPIX IPO, "[w]e expect the initial aftermarket trading to be highly speculative. Once the online retail community realizes that the deal is in great shape with institutional investors, they tend to pile on with very little price sensitivity." Also, JPMSI touted how well its IPOs traded in marketing its underwriting services to prospective IPO issuers.
     
20. The syndicate desk and JPMSI managers communicated to the sales force that customers' aftermarket interest and aftermarket buying were factors in allocating shares of oversubscribed IPOs.
     
21. For example, the head of Global ECM stated in a July 29, 1999 e-mail to the sales force that, with respect to the IPIX IPO, there were: "two key factors in determining allocations:
     
1. client ranking, i.e. business done with JPM [year to date] in 1999
    
2. transparency of position size, target price and approach to the aftermarket."
    
The e-mail also stated, "[w]hen we have a heavily oversubscribed deal, providing the transparency doesn't guarantee an account a good allocation it simply qualifies them for an allocation."
 
22. In morning meetings, the syndicate desk often reminded the sales force that they needed to provide to the syndicate desk any aftermarket interest and other information that they had from customers. The syndicate desk also called regional institutional sales managers and told them that they needed to ask for and provide customers' aftermarket interest and other information and the sales managers, in turn, told their sales force.
     
23. Additionally, in 1999 and 2000, one of the factors considered in reviewing sales representatives and in determining their compensation bonuses was their performance with IPOs. In a performance review of a sales representative, a listed accomplishment in 1999 was that the sales representative had given "accurate aftermarket color on our deals" and that clients "consistently followed [through on] their aftermarket color." In another performance review, a sales representative was told to "get more aftermarket color and generate aftermarket trading." Moreover, in May 2000, the syndicate desk distributed performance measurements for new issues to the sales representatives. The performance measurements, among other things, stated that "[h]aving the right aftermarket read during the allocation process will be rewarded."
     
24. During the restricted period, some sales representatives explicitly communicated to certain customers that providing aftermarket interest and aftermarket buying would help them obtain IPO allocations of oversubscribed and hot IPOs. For instance, a sales representative told a small institutional customer that establishing a good track record of giving aftermarket interest and following through with aftermarket buying would help the customer obtain good allocations. JPMSI obtained aftermarket interest from the customer in three oversubscribed IPOs and the customer followed through with aftermarket buying on the first trading day of two of the IPOs.
     
25. In addition, some of JPMSI's sales force communicated to certain customers that one of the factors that syndicate considered was the price up to which the customers were willing to buy stock in the aftermarket and that the sales force looked favorably upon the customers for following through with aftermarket buying.
     
26. Additionally, in an e-mail dated August 2, 1999 to the head of Global ECM from a sales representative about his customer's interest in an allocation in IPIX, the sales representative stated that the customer "knows he is expected to provide aftermarket color . . . His aftermarket color should be available before noon on Tuesday."
     
27. In the Large Scale Biology IPO, a different sales representative told her manager in an e-mail that she "was very aggressive in pushing [the customer] for aftermarket action -- stressing how important it was going to be for the process." As a result, JPMSI obtained aftermarket interest from that customer. The customer followed through with an aftermarket purchase and sold all of its IPO allocation and aftermarket purchases on the first day of trading.
     
28. Another sales representative told certain smaller customers that not expressing an interest in buying shares in the aftermarket disadvantaged them in the allocation process and that it was hard to get them any allocation if they did not provide that information. One of that sales representative's smaller customers expressed an interest in buying shares in the aftermarket in two oversubscribed IPOs and placed an aftermarket buy order on the first trading day for an amount of shares equal to its allocation in one of the IPOs. Another smaller institutional customer of that sales representative expressed an interest in buying shares in the aftermarket in two oversubscribed IPOs, but the aftermarket stock prices in the first week were above the price limits the customer provided and the customer did not purchase stock in the aftermarket.
     
29. Yet another sales representative told a small institutional customer that he could not go back to the syndicate desk with just an indication of interest for IPO shares, but also had to go back to the syndicate desk with aftermarket interest. JPMSI obtained the customer's expression of interest in buying shares in the aftermarket in three oversubscribed IPOs and the customer followed through with aftermarket buying on the first day or two of trading of all three IPOs.
     
30. During the restricted period, JPMSI's sales force also implicitly conveyed to certain customers that providing aftermarket interest and aftermarket buying was important in oversubscribed IPOs by updating the customers about the IPOs becoming more and more oversubscribed and hot and then soliciting aftermarket interest from them.

JPMSI Encouraged Certain Customers
to Increase the Price Limits of Their Aftermarket Interest

31. During the restricted period, JPMSI asked customers the price limits up to which they intended to buy in the aftermarket and certain sales representatives encouraged customers to increase their price limits, typically because other customers seeking allocations had provided aftermarket interest at higher price limits. For example, a sales representative told a customer that its aftermarket price limit was "sort of out of the game" and there was "interest at much higher levels." Another sales representative told a customer the price limits the customer should give to maximize its allocations and, at times, went back to the customer to suggest price limit increases.
     
32. Customers sometimes increased their aftermarket price limits after these types of conversations. For example, with respect to the Dyax IPO, a sales representative told the syndicate desk in an e-mail: "If [the customer] gets 50,000 [IPO shares], he will buy 50,000 more (up to $16). If need be, I will tell him to increase his aftermarket price sensitivity to a higher number." The customer received a 10,000 share IPO allocation and bought 10,000 shares on the first day of aftermarket trading at $20.88, a higher price than he had originally indicated.
     
33. Another institutional customer at times increased his aftermarket price limit after being told by his sales representative that his price limit was lower than other customers' aftermarket price limits. The customer provided aftermarket interest with price limits in four oversubscribed IPOs and followed through with aftermarket buying on the first day of trading in three of those IPOs. The customer did not purchase in the aftermarket of the remaining IPO, which traded below the IPO price on the first day of trading. The customer also provided aftermarket interest with no price limit in a fifth oversubscribed IPO and followed through with aftermarket buying in that IPO in the first two days of trading.

JPMSI Solicited Aftermarket Interest from Certain Customers It Knew
Had No Interest in Holding Stock in the IPO Companies

34. During the restricted period, JPMSI solicited aftermarket interest from certain customers it knew had no interest in owning the stock of the IPO companies long term. For instance, an institutional customer told a sales representative that he was not interested in owning shares of Large Scale Biology long term, yet that sales representative obtained aftermarket interest from the customer. The customer received an allocation of Large Scale Biology, bought additional shares in the aftermarket, and then sold all of his IPO allocation and aftermarket shares within several days of the IPO.
     
35. In the IPIX IPO, JPMSI's institutional pot book indicated that a customer is "one of the few who may actually own the stock longer term," yet an e-mail from the head of Global ECM said that JPMSI had obtained aftermarket interest from over 30 customers.
     
36. In addition, the head of the syndicate desk knew that certain customers usually or always flipped their IPO allocations. Yet JPMSI solicited aftermarket interest from some of these customers.
     
37. Despite the fact that such flipper customers generally had no interest in owning the stock of the IPO companies long term, JPMSI expected those customers to follow through and buy in the aftermarket when they had provided aftermarket interest. For instance, in two e-mails pertaining to the Medicines Company and Large Scale Biology IPOs, the syndicate desk told the sales force that as many as ten customers who usually flipped allocations and who had bought shares in the aftermarket had "met or exceeded their aftermarket obligation." The syndicate desk also noted in the e-mails that six customers who usually flipped allocations had only "partially met their aftermarket obligation" and that two other such customers had "not followed through on their aftermarket color."
     
38. A number of customers who usually flipped allocations bought in the aftermarket and then sold their allocation or closed out their entire position within days of the IPOs. The only reason that some of these customers gave aftermarket interest and bought in the aftermarket was that they understood from JPMSI that this would help them obtain a good IPO allocation.

JPMSI Accepted And In at Least One Instance
Sought "1 for 1" or other Similar Aftermarket Interest

39. During the restricted period, JPMSI accepted aftermarket interest of "1 for 1" from certain customers, meaning that the customers intended to buy in the aftermarket an amount of shares equal to their IPO allocation. In at least one instance, JPMSI also sought this type of aftermarket interest from a customer. A sales representative e-mailed the syndicate desk that, with respect to the Dyax IPO, his customer would be "aftermarket buyers as long as the stock is up a reasonable amount (sorry no more clarity than this)," to which the head of the syndicate desk responded:
    
    
    'Reasonable' could be used after the deal prices as $1 or whatever they choose to explain why they didn't buy. Please see if you can get more color from them about price and/or size . . . i.e. . . . one for one or a position size.
    
    This customer received a 50,000-share allocation in the Dyax IPO and placed an order for 50,000 shares in the first day of aftermarket trading.
     
40. JPMSI also accepted aftermarket interest from certain customers who said that they intended to purchase aftermarket share amounts that were pegged to specific IPO allocation amounts without any reference to a fixed total position size, albeit not "1 for 1." For example, in an August 14, 2000 e-mail, a sales representative told the head of syndicate that with respect to the Dyax IPO:
    
    
    [My customer] put in an order for 200,000 shares. He said he'd buy 150,000 in the aftermarket if he receives 50,000. (If he gets 25,000 he'll buy 75,000 and if he gets 10,000 he'll buy 40,000). He participated on Medicines and Large Scale and has bought in the aftermarket on both as indicated. No price sensitivity in aftermarket buying.
    
     
41. In the Dyax IPO, 43 customers were noted in the institutional pot book as having provided aftermarket interest. Twenty of those customers provided aftermarket interest of "1 for 1" or other aftermarket interest that was pegged to allocation amounts.
     
42. The "1 for 1" or other aftermarket interest that was pegged to different allocation amounts did not provide information as to a customer's desired position size or whether a customer intended to be a long-term holder. Nonetheless, some customers who gave this type of aftermarket interest received large allocations. By accepting and/or seeking this type of aftermarket interest from customers, JPMSI attempted to induce customers to buy in the aftermarket in accordance with the customers' aftermarket interest.

JPMSI's Conduct after the Restricted Period Reflects its
Attempts to Induce Customers to Purchase Stock in the Aftermarket

43. After the distribution of IPO shares was complete, JPMSI solicited aftermarket orders from customers who had provided aftermarket interest and tracked customers' aftermarket purchases. JPMSI also described certain customers' aftermarket interest as promises, commitments or obligations to buy stock in the aftermarket. This conduct demonstrates that when JPMSI previously had solicited aftermarket interest from customers during the restricted period, it was attempting to induce customers to make aftermarket purchases in the first few days of trading..

A. JPMSI Solicited Aftermarket Orders from Institutional
Customers Who Had Provided Aftermarket Interest

44. After the distribution was complete, and at times before the stock started trading in the aftermarket, JPMSI's sales force called customers who had given aftermarket interest and solicited aftermarket orders from them. In some instances, JPMSI managers asked the sales force to make these calls to customers. For example, early on August 5, 1999, the morning of the IPIX IPO, the head of Global ECM sent an e-mail to the sales force and JPMSI's Chief Operating Officer, stating:
    
    
    [The] key issue this morning . . . is to build as big a book of aftermarket orders as we can . . . we need to have the 30 plus accounts that said they would be buyers today in right away.
    
     
45. On some IPOs, the syndicate desk created an aftermarket trading demand sheet that showed the aftermarket interest that customers previously had given and the allocations the customers had received. The aftermarket trading demand sheets were sent to the sales force to use in making follow-up calls to customers to solicit them to place aftermarket orders.

B. JPMSI Tracked Customers' Aftermarket Purchases

46. After the stock began trading, JPMSI managers and the syndicate desk frequently tracked customers' aftermarket buying, for instance: (1) through secondary trading activity reports which tracked customers' purchases during a two week period; (2) by watching the opening of trading and observing customers' buy orders that were placed on the trading desk; and/or (3) through reports generated for some IPOs that listed the customer and the number of shares purchased or sold on the first day through JPMSI.
     
47. The sales force also received daily reports of all trading activity that their customers did through JPMSI on the previous day.

C. JPMSI Encouraged Certain Customers Who Had Given Aftermarket Interest, but Had Not Yet Bought in the Aftermarket, to Place Aftermarket Orders

48. JPMSI managers and the syndicate desk on certain occasions encouraged the sales force, after trading commenced, to try to get customers who had given aftermarket interest, but had not yet bought in the aftermarket, to place aftermarket orders. For example, on August 6, 1999, the day after the IPIX IPO started trading, the head of Global ECM sent an e-mail to regional sales managers (which was intended for their sales representatives) and the head of syndicate:
    
    
    [H]ere is the fact base on where we stand at the end of yesterday with the accounts who got 40,000 shares or more in the U.S. pot. Bottom line: there should be a TON OF BUYING POWER IN IPIX if we follow through on this list today.
    
    The e-mail set forth various allocation share tiers (i.e., 125,000, 90,000, 75,000 and 40,000 share tiers), the customers under those tiers and how many shares they bought or sold on the first day. The e-mail also included comments regarding various customers' aftermarket activity, for example: (1) one customer "bought 15,000 - unacceptable, we gave our #120 account this allocation based on them filling out the 200,000 shares to $28 - I would hold them to it today and going forward"; (2) a second customer "bought 25,000. We sorted out confusion over Bamboo claims by having them on the phone with IPIX's CEO yesterday - they owe it to us to be in buying the stock today"; (3) a third customer "sold 125,000. The stock is trading naturally now, so based on [a sales manager's] note they should be in buying - really their only way to erase a big negative with us"; (4) a fourth customer "bought 10,000 . . . this must be the tenth time we've listened to their 'we will be a big buyer without price sensitivity' then given them a large allocation and they've not shown up - we should push them today and if they don't show up, keep them out of these tiers going forward"; (5) as to a fifth customer, "nothing - our #367 account said they were a buyer in the low 20s - unacceptable"; (6) a sixth customer "bought 25,000 shares at end of day; had said they would be there in size to $25, should be more today"; and (7) as to a seventh customer "nothing, had said they would buy to $22 . . . let's make them show up today." After this e-mail, at least one of the listed customers placed aftermarket buy orders for 230,200 shares of IPIX stock.
     
49. In two other IPOs, Medicines Company and Large Scale Biology, the head of the syndicate desk sent e-mails on August 11, 2000 to the sales managers and the sales force attaching "the after market trading for every account in the Offering" and stating:
    
    
    We have broken the accounts into 4 buckets according to their after market trading relative to the color they indicated - using a current share price of $20.75.
    
    The e-mail continued to explain that the "4 buckets" were:
    
    
    1. Completed after market trading obligation.
    2. Partially completed their after market obligation.
    3. Haven't completed any of their after market obligation.
    4. Contradicted their after market obligation.
        
    With respect to more than 80 customers, the e-mail listed the customers who had "met or exceeded their aftermarket obligation," "partially met their aftermarket obligation," had "not followed through on their aftermarket color," "contradicted [their] aftermarket color," and customers who JPMSI "would expect to see orders from" if the share price declined further. One sales representative on August 11, 2000, forwarded the e-mails to some of the sales force in his office. With respect to the Medicines Company IPO, the sales representative noted in his forward "[that the head of the syndicate desk] would obviously like us to follow up with our clients so that they can fulfill their initial needs."
     
50. JPMSI's sales force conveyed to certain customers who had provided aftermarket interest, but had not bought in the aftermarket, the importance of aftermarket buying. For instance, a sales representative for a customer who had given aftermarket interest of "1 for 1" responded to the syndicate desk concerning the above-referenced Large Scale Biology and Medicines Company e-mails, saying:
    
    
    I spoke to [the customer] he will be buying medicines this afternoon and more next week. He will be buy [sic] 10,000 large scale today and again will look at buying more next week…I don't think [the sales assistant] made it clear enough to this [portfolio manager] how we work. I know this is no excuse but I am trying to rectify the situation with the account.
    
    After the sales representative's phone call, the customer bought 10,000 shares of Medicines Company in the aftermarket and also placed buy orders for 15,000 shares of Large Scale Biology in the aftermarket.
     
51. After the August 11, 2000 e-mail relating to Medicines Company, additional customers also placed buy orders: three customers listed as having "partially met their aftermarket obligation" placed buy orders for a total of 105,300 shares; and two customers listed under "if the share price declines to $20, we would expect to see orders from the following accounts" placed buy orders for a total of 115,000 shares.
     
52. After the August 11, 2000 e-mail relating to Large Scale Biology, additional customers also placed buy orders: four customers listed as having "partially met their aftermarket obligation" placed buy orders for a total of 134,000 shares of stock; and one customer listed as having "not followed through on their aftermarket color" placed a buy order for 146,300 shares of stock.
     
53. In addition, on July 20, 1999, the day of the Genentech IPO, an institutional customer who had given aftermarket interest and had received a large IPO allocation did not buy any aftermarket shares. The head of Global ECM sent an e-mail to the customer's sales representative. In an e-mail with the subject line "Re: what the hell is [the customer] doing?", the sales representative responded: "Trying to read your mind again, "I called the [customer] to ask them what the hell are they doing!"

D. JPMSI Described Certain Customers' Aftermarket Interest as Promises, Commitments or Obligations to Buy Stock in the Aftermarket

54. JPMSI's syndicate desk and management described certain customers' aftermarket interest as promises and obligations. For instance, after the IPIX IPO, which traded below the IPO price during the first day of aftermarket trading but closed above the IPO price, the head of Global ECM said that "the main reason we broke issue [meaning the stock traded below the IPO price] is that so many of our promises did not show up . . ." In addition, in e-mails relating to the Medicines Company and Large Scale Biology IPOs, the head of the syndicate desk referred to certain customers as having "met or exceeded their aftermarket obligation."
     
55. JPMSI's sales force also on a number of occasions conveyed to the syndicate desk and management that customers had guaranteed, promised, or committed to purchase stock in the aftermarket. In response to the August 11, 2000 e-mail from the head of syndicate setting forth the aftermarket trading of customers with respect to the Medicines Company IPO, a sales representative wrote back to the head of syndicate, stating: Looking over your list, it seems like some of the numbers you had were a little quirky. I think all of my clients are completed (or significantly on the way to being completed) with their 1-for-1 aftermarket commitments.
    
    The sales representative noted that: one customer "Got 200k, bought 125k on day 1 and has another 30k on the desk with a $20 limit. Lots more to go if they can find the liquidity"; a second customer "Got 50k, bought 25k on the first trade. Will fill in remainder over next few days below $20"; a third customer "Got 200k, bought 153k. Will fill in the remainder below $20 as liquidity allows"; and a fourth customer is "Done."
     
56. The sales representative also noted the follow-through of his customers on the Large Scale Biology IPO: one customer "Got 100k, bought 100k. Done"; and another customer "Got 30k, bought 20k. Done for now, as guided, will wait until they have more chance to do work."
     
57. In an August 5, 1999 e-mail relating to the IPIX IPO, a sales representative told a regional sales manager that an institutional customer "deserves BIG kudos for stepping up 1:1 as promised (and despite big [Portfolio Manager] reservations)!!" The customer received an allocation of 90,000 shares of IPIX and purchased 90,000 shares in the aftermarket on the first day of trading.
     
58. In two other e-mails about two IPOs (Genentech and Large Scale Biology), sales representatives said that one institutional customer "followed up in the aftermarket exactly as promised (every share through us)," and a second institutional customer would "buy on the first day to support the deal at virtually any price" and would "always honor his commitment in the aftermarket." The second customer placed buy orders for 15,000 shares of Large Scale Biology on the first day of trading.
     
59. With respect to the Large Scale Biology IPO, a sales representative noted in an August 9, 2000 e-mail with respect to an institutional customer:
    
    
    If he gets 50,000, will buy 150,000 in aftermarket, If 25,000, will buy 75,000 in aftermarket, If 10,000 will buy 40,000 in aftermarket. No price sensitivity. As promised for [the Medicines Company IPO], he will be buying the 40,000 today.
    
    That customer followed through in both deals with aftermarket buying in the first two days of trading.
     
60. As to the IPIX IPO, a sales representative told the syndicate desk in an e-mail dated February 3, 2000:
    
    
    [A]s promised [a customer] was an aftermarket buyer at the $10, $14, $18 price levels (and most recently at the $28-29 levels). So as his actions show, he is a quality investor and delivers on his promises - We need to give him a better allocation this time when he puts in an order.

JPMSI Violated Rule 101 of Regulation M in One IPO by
Soliciting For Aftermarket Orders from Certain Customers After It Announced Syndicate Had Broken, but Before All Shares Actually Had Been Distributed, and by Rewarding One Such Customer for Placing an Aftermarket Order by Giving It Additional IPO Shares

61. In the Large Scale Biology IPO, JPMSI solicited certain customers for aftermarket orders after it announced that syndicate had broken, but before the IPO shares had all been distributed. Therefore, JPMSI was still in the restricted period and prohibited from attempting to induce customers to place aftermarket orders.
     

 
62. JPMSI rewarded an institutional customer who gave aftermarket interest and followed through with an aftermarket order by giving the customer a larger IPO allocation. In the Large Scale Biology IPO, after it announced that syndicate had broken, JPMSI solicited a customer to place an aftermarket order for Large Scale Biology. However, at the time of the solicitation, JPMSI was still in the restricted period. The customer placed an order to buy 20,000 shares of Large Scale Biology in the aftermarket. The syndicate desk increased the customer's IPO allocation by 500 shares before trading had commenced and by an additional 2000 shares after trading had started.

Customers Providing Aftermarket Interest Followed Through and Placed Aftermarket Orders for Substantial Amounts of Shares

64. Many of the customers who provided aftermarket interest followed through and placed aftermarket orders through JPMSI in the first day of trading of the hot IPOs. For instance, for customers who had given aftermarket interest with prices below where the stock traded on the first day, about 89% of customers followed through with aftermarket orders in the first day of trading in the Dyax IPO. In addition, for customers who had given aftermarket interest with prices below where the stock traded on the first day, about 70% of customers providing aftermarket interest followed through with aftermarket orders in the first day of trading in the Medicines Company IPO.
     
65. Customers who provided aftermarket interest also placed aftermarket orders for substantial amounts of shares. For example, on August 10, 2000, JPMSI underwrote the IPO for Large Scale Biology -- a 5.75 million share offering. During the restricted period, JPMSI solicited aftermarket interest from a number of customers. JPMSI's institutional pot book and e-mails reflect customers' aftermarket interest.
     
66. Customers who provided aftermarket interest followed through and placed aftermarket buy orders for 1,929,500 shares of Large Scale Biology on its first day of trading. These orders constituted approximately 33% of the total shares in the offering.

JPMSI Persuaded One or More Customers to
Take an Allocation of Biopure, a Cold IPO, by Promising
an Allocation of IPIX, an Upcoming Oversubscribed IPO

67. JPMSI had difficulty obtaining sufficient indications of interest for shares of the Biopure IPO, a cold deal offered in July 1999. Because of the difficulties in generating sufficient interest for the Biopure IPO, JPMSI reduced the number of shares being offered and reduced the proposed price range from $15.50-$17.50 per share to $12-$14 per share the day before the IPO and also delayed the final pricing of the IPO by one day.
     
68. Prior to Biopure going public, JPMSI's head of Global ECM conveyed to syndicate and the sales force that customers who expressed "concern[ ] about their allocation levels relative to their indications" could be rewarded with IPIX, an upcoming oversubscribed IPO. On the evening of July 29, 1999, when the Biopure IPO was priced, but before the customers had been told of their allocations, the head of syndicate sent an e-mail to the head of Global ECM and other members of ECM and syndicate, noting:
    
    
    [The head of Global ECM] is making a comment at the morning meeting to the effect that the IPIX allocations (very strong deal) will be heavily weighted toward those investors that participated in the Biopure offering. I think this is an important point for you to highlight tomorrow morning because we want our sales force and investors to have comfort that they will be rewarded for participating in this deal. Given that we have fully allocated all accounts in the Biopure deal based upon the most recent indications, it is extremely important that your investors take these allocations. I want to reiterate that we will provide you with the means to reward these clients if they are concerned about their allocation levels relative to their indications.
    
    (Emphasis added). 
     
69. Moreover, that same day, in response to a sales representative's e-mail about his customer's interest in IPIX, the head of Global ECM replied that "the fact that [the customer] is in for Biopure will help them a lot, we will be looking closely at Biopure."
     
70. In addition, on the morning of the Biopure IPO, while the IPO was still in distribution, and before all customers had accepted their allocations, the head of Global ECM conveyed to the sales force in a morning meeting that JPMSI would give customers who participated in Biopure better allocations of IPIX for helping out JPMSI by participating in Biopure.
     
71. A number of customers who took large allocations of Biopure also received allocations of IPIX. On the afternoon of the first day of trading of Biopure, when the stock had traded down from the IPO price of $12 to a low of $9.75, the head of Global ECM told the heads of the sales force and various representatives in an e-mail: "[r]ecognizing that Biopure has had a tough morning, please feel free to put any of the names that were allocated 50,000 shares or more into IPIX, which prices on Wednesday and is well oversubscribed. While stock will be scarce for everyone, we will make sure that they are treated well." The head of Global ECM listed 11 such customers in his e-mail and two additional customer names were forwarded to him in response to his e-mail. Ten of these customers, who had been allocated a total of 895,000 Biopure shares, received allocations of IPIX.
     
72. Additionally, the IPIX institutional pot book had an "Extra Data" column containing the amount of shares various customers were allocated in Biopure. The IPIX pot book "Extra Data" column reflected that about 20 additional customers, who had been allocated a total of 250,400 Biopure shares, also received allocations of IPIX.
     
73. JPMSI, in fact, specifically persuaded one or more customers to take an allocation of Biopure by promising the reward of an allocation of IPIX. One customer's sales representative informed the customer that it would help his allocation of IPIX if the customer took an allocation of Biopure. The customer took an allocation of Biopure to help his allocation in IPIX. In addition, JPMSI's institutional pot book for the Biopure IPO contains notes next to a customer's indication of interest in the IPO that state: "short term" and "will hold short term for JPM." The Biopure institutional pot book also contains the note "favor order" next to another customer's indication of interest in the IPO. Further, an e-mail from the head of Global ECM about IPIX customers stated as to a customer that "this [125,000 share IPIX] allocation was partly for Biopure." A sales manager listed another customer in an e-mail to the head of Global ECM as a priority for receiving a good allocation of IPIX, stating that the customer "bought 25,000 BPUR -- Need I say more." Another e-mail, dated August 5, 1999 to the head of Global ECM with the subtitle "Paybacks for Prior Sins," sought allocations of IPIX for three customers who had taken Biopure.

FIRST CLAIM FOR RELIEF

VIOLATION OF RULE 101
OF REGULATION M UNDER THE EXCHANGE ACT

74. Paragraphs 1 through 73 are realleged and incorporated herein by reference.
     
75. During the restricted period, JPMSI attempted to induce certain customers to make aftermarket purchases by engaging in the following activities. JPMSI solicited customers to provide information about whether and at what price and in what quantity they intended to place aftermarket orders for IPO stock. JPMSI communicated to certain customers that providing aftermarket interest and/or aftermarket buying would help them obtain allocations of hot and oversubscribed IPOs. JPMSI encouraged certain customers that had provided aftermarket interest to increase the prices they had told JPMSI they were willing to pay in the aftermarket. JPMSI solicited aftermarket interest from certain customers who JPMSI knew had no interest in owning the stock of the IPO companies long term. In addition, JPMSI accepted and/or sought aftermarket interest from certain customers who said they intended to purchase an amount of shares in the aftermarket equal to the size of their allocation ("1 for 1") or intended to purchase specific amounts of shares in the aftermarket that were pegged to different allocation amounts without any reference to a fixed total position size. Furthermore, in the Large Scale Biology IPO, JPMSI solicited for aftermarket orders from customers before all IPO shares had been distributed and rewarded one such customer for its aftermarket order by allocating it additional IPO shares.
     
76. By reason of the foregoing, JPMSI violated Rule 101 of Regulation M under the Exchange Act [17 C.F.R. § 242.101].

SECOND CLAIM FOR RELIEF

VIOLATION OF NASD CONDUCT RULE 2110

77. Paragraphs 1 through 76 are realleged and incorporated herein by reference.
     
78. NASD Conduct Rule 2110 requires members to observe high standards of commercial honor and just and equitable principles of trade.
     
79. JPMSI violated Rule 2110 by persuading one or more customers to take an allocation of Biopure, a cold IPO, by promising the reward of an allocation of IPIX, an upcoming oversubscribed IPO.

RELIEF REQUESTED

WHEREFORE, the Commission respectfully requests that this Court enter an Order:

I.

Permanently restraining and enjoining JPMSI from violating, directly or indirectly, Rule 101 of Regulation M under the Exchange Act and NASD Conduct Rule 2110.

II.

Requiring JPMSI to pay a civil penalty pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)].

III.

Granting such other and further relief as the Court may deem just and proper;

IV.

Retaining jurisdiction of this action in order to implement and carry out the terms of any Orders that may be entered herein.