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The Securities and Exchange Commission (SEC) is investigating how certain investment firms managed to obtain a disproportionately large share of VA Linux's IPO.

According to the Wall Street Journal's interactive edition, regulators are looking into the VA Linux offering as part of a wider probe into whether some investors paid unusually large trading commissions in exchange for preferential allocations of stock during IPOs. Other offerings that may be brought into the inquiry include Foundry Networks

VA Linux shares went public at $30 and closed after their first day of trading, 9 December 1999, at $239.25 - an almost eight-fold increase in value. This was the biggest-ever first day jump for an IPO.

The investigation will look at whether hedge funds paid over the odds on commissions for other trades with firms that controlled the allocation of IPO shares, in order to boost the number of shares they receive. These outsized commissions may have been as much as $1 per share - or twenty times the going rate.

Securities dealers have wide discretion to allocate IPO stock and large commissions may have been legal in the context of an overall business relationship but the possibility that these payments are "kickbacks" is being taken seriously.

The Wall Street Journal quotes unnamed sources who said two smaller investment firms GLG Partners and Chelsey Capital received 35,000 shares and 15,000 shares in VA Linux - which gained in value by 7.3 million and $3.1 million respectively on the first day of trading. The allocations approached those given to those of far bigger and better known Wall Street firms, raising concerns about possible impropriety.

The VA Linux offering is believed to be an early focus of a wider probe, being jointly conducted by the U.S. attorney for the Southern District of New York and the SEC's enforcement division, neither of whom is talking publicly about the investigation. However the lead underwriter of the VA Linux deal, Credit Suisse First Boston unit has confirmed that an inquiry is underway.

The WSJ quotes people close to the inquiry who say regulators are attempting to determine patterns of big allocations followed by large trades in other stocks

It isn't certain whether GLG or Chelsey paid large commissions or are a particular focus of the SEC probe. A senior executive from London-based GLG said he was aware of the investigation but said that the firm "was neither the focus not target" of the inquiry.

Regulators are understood to have already sought information from hedge funds and most major Wall Street securities firms as part of the enquiry.

According to the WSJ subpoenas issued to the Wall Street firms sought lists of investors which got 1,000 shares or more during hot IPOs, as well as records of trades of 10,000 shares or more that incurred commissions of more than twice the prevailing rate of five cents per share. ®

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