Charles Schwab, TD Ameritirade sue Goldman Sachs for blocking IPO access

A customer exits a Charles Schwab January 10, 2001 in Lexington MA. Schwab, which is scheduled to report earnings next week, announced that it will have difficulty meeting expectations for it’s 4th quarter earnings even after cutting executive salaries and freezing hiring. Darren McCollester/Newsmakers

• TD Ameritrade and Charles Schwab filed a lawsuit against Goldman Sachs on Thursday.
• The brokerages say Goldman is in violation of a 17-year agreement that says it must reserve 15% of initial-public-offering shares for retail customers. 
• Without these reserves, customers could miss out on potentially lucrative investments in newly public companies. 

The widening rift between Wall Street and Main Street was once again on display as two major brokerages accused Goldman Sachs of blocking their clients from potentially lucrative investments in initial public offerings.  

In a lawsuit suit filed with the New York State Supreme Court Thursday afternoon, TD Ameritrade and Charles Schwab said Goldman has abandoned a 2001 agreement to hold 15% of the IPO shares it underwrites for retail investors.

Until now, this arrangement allowed investors who aren’t Goldman clients to buy a stock at its IPO price, rather than placing a market order and potentially paying much more if the stock begins trading above that price, as often happens with IPOs. Take Eventbrite, for example, which opened at $36 in its trading debut on Thursday after initially pricing at $23. 

“We filed the lawsuit as part of our continuing efforts to level the playing field for retail investors,” TD Ameritrade said in a statement to Business Insider.

“It’s standard practice for investment banks such as Goldman Sachs to control who gets access to IPOs, often reserving their allotment of IPO shares for their institutional or highest net worth clients. This exclusionary process effectively serves to shut out smaller individual investors from these increasingly rare opportunities.”

The disagreement surrounds an online-investment bank called Epoch Partners, which was created in 1999 by a consortium of broker dealers, including TD and Schwab, to allow retail investors direct access to newly issued securities. When Goldman acquired Epoch in 2001, it agreed to continue the practice of holding shares for those retail investors.

After a series of notices that began on April 4, 2018, Schwab and TD allege in the lawsuit, Goldman terminated the agreement on Thursday. Goldman Sachs did not immediately respond to a request for comment from Business Insider.

“Simply put, Goldman Sachs should not be permitted to improperly terminate its agreement with Schwab and TD Ameritrade and allocate to its own customers (or anyone else) the shares that rightfully belong to Plaintiffs, at great harm to Plaintiffs,” the court filing reads. 

“Despite Goldman Sachs’ actions, our ability to offer clients with access to the broader publicly traded equity markets, including newly trading issues, is not impacted,” Schwab assured its customers in a statement.

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