hot issue A new security issue for which investor demand exceeds securities available in the issue. National Association of Securities Dealers rules forbid members from taking advantage of the likelihood that these securities will rise in price immediately after issue. See also Form FR-1, investment history, normal investment practice. Case Study The stock market boom of the late 1990s produced some spectacular price gains, especially in new issues of dot-com companies. The quick and seemingly effortless road to riches of buying hot issues in the primary market and then quickly selling these same stocks in the secondary market resulted in substantial profits and was often accompanied by questionable dealings. In January 2002, following a ten-month investigation, NASD Regulation announced that it had censured and fined Credit Suisse First Boston (CSFB) $50 million for taking millions of dollars from customers in inflated commissions in exchange for allocations of "hot" IPOs. NASD claimed the inflated commissions amounted to an illegal profit-sharing arrangement with CSFB. The settlement also included CSFB paying an additional $50 million to the Securities and Exchange Commission. According to the charges CSFB instructed employees to give greater stock allocations to accounts that agreed to share their profits with CSFB. The profit sharing was disguised as inflated brokerage commissions on transactions unrelated to the IPOs. For example, in one instance a CSFB customer obtained an allocation of 13,500 shares in a VA Linux IPO. The customer subsequently sold two million shares of Compaq and paid CSFB 50¢ a share, or $1 million in brokerage commissions. The customer immediately repurchased the same Compaq shares at the normal commission rate of 6¢ per share. The customer's $880,000 in excess commissions paid to CSFB for the Compaq sale were more than offset when the VA Linux PIO shares were sold for a one-day profit of $3.3 million. In another instance, a CSFB customer paid a $650,000 commission to purchase one million shares of Disney shortly after receiving allocations of IPO shares of both VA Linux and FogDog. The 65¢ per share commission was substantially more than the client subsequently paid a different broker-dealer to immediately sell the Disney shares. |
Hot issue. If a newly issued security rises steeply in price after its initial public offering (IPO) because of intense investor demand, it is considered a hot issue.