Further squeezing the neck on the bottle by limiting flipping helps trigger the price explosion in shares on the first day of trading. That makes both the company and the underwriter look good in the media. It also allows the underwriters' favorite clients to sell out at inflated prices, she says. Individual investors and money managers who sell shares before they're supposed to are quickly found out. At Wit Capital, if clients resell their shares within 60 days of an IPO, they are relegated for 60 days to the bottom of the list for other IPOs.
Underwriters also punish their brokers if they sell the shares for investors.
McInerney says the penalty can be twice the commission on the trade. McInerney's lead plaintiff, Alan Friedman, a Los Angeles investor, says he tried to unload his 2,600 shares in WebSecure just after its IPO in December 1996. He was told that if he did, he would not be given a chance to buy future IPOs, his broker would be penalized, and his account might be closed. Massachusetts is investigating whether it should have a policy against any broker or underwriter who stops investors from selling IPO shares. Joseph Visconti, chairman and CEO of Joseph Charles, defends the antiflipping restraints his firm imposes on clients.