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Red Hat has been accused of violation of federal securities laws in a class-action lawsuit that alleges investors were misled about aspects of its initial public offering.

The suit, filed in US District Court, Southern District of New York yesterday, charges the Linux distributor, its senior executives and securities houses of granting preferential share allocations during Red Hat's August 1999 IPO.

These privileges were obtained, it is alleged, in exchange for "excessive commissions in transactions on other securities".

Red Hat's shares were offered at $14 and almost quadrupled on the first day of trading, closing at $52 and the lawsuit rests on the argument that Red Hat made misleading statements in its prospectus and did not give smaller investors a fair slice of a lucrative pie. The price is currently $4.74.

Law firm Milberg Weiss Bershad Hynes & Lerach has named Red Hat, and its executives Robert Young, Marc Ewing and Matthew Szulik in its action. Unspecified damages are also being sought from Goldman Sachs, the underwriters of the offer, and brokers Credit Suisse First Boston.

As previously reported, the Securities in Exchange Commission is investigating whether Wall Street firms made illegal payments in exchange for more shares in hot IPOs. The accusations made against Red Hat follows the pattern of charges against hardware firm VA Linux, which is accused of similar financial skulduggery in connection with its IPO. ®

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