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Class action lawsuit filed against VA Linux

Legal action follows regulatory probe into tech IPOs

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A class action lawsuit has been launched against VA Linux on behalf of shareholders who feel they were deceived by the company during its initial public offering (IPO) last year.

The lawsuit, which also names the lead underwriter of the flotation Credit Suisse First Boston and VA Linux executives including Larry Augustin and Todd Schull, contends that VA Linux failed to reveal in its prospectus that shares were promised during the offering to investors who agreed to buy more shares later at predetermined prices in after hours trading.

The legal action follows news that the Securities and Exchange Commission (SEC) is in the process of investigating whether investors in initial public offerings, including VA Linux's, paid inflated commissions on other trades to underwriters in return for preferential share allocations during 'hot' IPOs.

As previously reported, regulators are understood to have already sought information from hedge funds and most major Wall Street securities firms as part of the enquiry, which is believed to go far wider than just VA Linux. Investigators, who are not commenting on the inquiry, are trying to establish a pattern of big allocations in much-anticipated offerings followed by large trades in other stocks.

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 class action lawsuit, filed by New York law firm of Milberg Weiss Bershad Hynes & Lerach LLP, argues this rise was due to undisclosed tie-ins, "which locked in demand for Linux shares in the after-market at levels well above the offering price."

A copy of the complaint can be viewed on Milberg Weiss' website here.

One interesting piece of information to come out of the lawsuit is that the SEC is also looking at the IPOs of Ariba and United Parcel Service in connection with its probe. We await developments with interest. ®

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