Investigators Looking into Claims that Some IPOs Are Cons.

Byline: Miriam Hill

May 15--Initial public offerings have always worked like a giant game of "You scratch my back, I'll scratch yours."

Investors who get the limited number of shares available at the extra-low IPO price often profit handsomely.

Because IPO shares promise big profits, investment bankers, who are charged with allocating the shares before they begin trading, reserve them for their best customers, the money managers who generate big profits for the investment banks by buying large blocks of shares.

Another way to be a good customer is to pledge not to dump the shares immediately for a quick profit. Even better: Commit to buying more shares at higher prices post-IPO. This would be illegal if the underwriter solicited the post-IPO purchases.

Requiring clients to buy in the aftermarket would help a stock's price rise quickly. Investment bankers like clients who buy in the aftermarket because it creates a strong trading environment for the stock.

But now allegations have arisen that in the frenzy of 1999 and 2000, investment bankers stretched the normal rules in ways that violated federal securities regulations and industry guidelines. If the most serious of the allegations are true, it would mean that some IPOs were little more than giant con games -- with the individual investor as the dupe.

The regulatory arm of the National Association of…