Stock Deals for the Rich and Famous

By Adam Zagorin/Washington

The secret to success in the stock market is to have the right timing and information. And one dirty little secret is that some people get a chance to profit from perfect timing and fabulous information. Take House Speaker Tom Foley. Over the past four years, he made more than $100,000 buying shares in hot new companies and "flipping" them almost immediately at a handsome profit. The Speaker hit pay dirt in 40 out of 42 deals, an awesome record that even a Warren Buffett would envy.

Foley claims he did nothing illegal, and he's right. Like many other insiders, he was able to get in on some hot Initial Public Offerings (IPOs), in which privileged players are given the chance to buy shares in emerging companies just before they are offered to the general public. The revelation of Foley's sweet deals by Roll Call, a spry newspaper published twice a week that covers Capitol Hill, shed light on how some IPOs are doled out to a select few while ordinary folks are never given a chance to invest.

Foley's Wall Street winning streak places him in a charmed circle of investors who are cashing in on today's supercharged IPO market. Buoyed by low interest rates that spur investors to seek higher returns in stocks, American companies are raising record amounts of capital that should make 1993 the biggest year ever for IPOs. So far, more than $20 billion has been raised in IPOs this year.

When the initial share price of these new offerings is set too low by the brokerage firms handling them, it can lead to instant windfalls for those lucky enough to be let in on the ground floor. Celestial Seasonings, a hip purveyor of herbal teas, went public at $20 a share on July 13, and by the end of the day was selling at more than $29. Back Yard Burgers, a fast-food chain based in Memphis, Tennessee, offered itself at $6 a share and shot up the next day to $10.25. On average, the price of IPO shares jumps more than 15% in the 24 hours after they are issued.

Not all investors are winners, and some IPOs flame out rapidly. But savvy insiders have a pretty clear idea of which new offerings are destined to be hot. That is because many are deliberately underpriced by the investment firms that bring them to market in order to minimize their own risk. (These underwriters are left holding the shares if not enough investors can be found.) When there is excessive demand for an upcoming IPO -- and thus a pretty good guarantee that the shares will jump once they go on the open market -- big brokers dole out the privilege of buying them to favored clients. Those lucky enough to be cut in at the low initial price tend to flip their holdings quickly as thousands of ordinary Americans bid up the stock.

Brokers usually pass the low-cost shares only to clients who generate the fattest commissions. Foley, a stock-market neophyte with a small account, does not fit that profile. "Foley may just be lucky in the stock market," comments Ellen Miller, executive director of the Center for Responsive Politics, a watchdog group. "But it raises the question, Did he get a special deal, and why do people want to be so especially nice to members of Congress?"

The Speaker managed to join the elite ranks of favored IPO buyers through a high school chum who is now his broker, Peter de Roetth of Boston's Account Management Corp. De Roetth defended his sweet offerings by saying, "I would like Tom Foley not to have to think about money." Putting up very little cash, Foley allowed De Roetth to buy and quickly sell shares in companies that rose dramatically in value soon after they were issued. Says Jay Ritter, a professor of finance at the University of Illinois: "Speculators like Foley are just feeding at the trough, throwing sand in the economic gears between suppliers and users of capital." Foley's spokesman strongly disagreed: "There is no law saying an American citizen can't make money in the stock market, even if he is Speaker of the House of Representatives."

Foley is a staunch supporter of President Clinton's budget and its support of small business. That plan, as passed by the House, would cut capital gains taxes 50% for investors in IPOs issued by some small companies, provided the shares are held for at least five years. But if the bill passes, Foley won't benefit. His short-term speculative deals will still be taxed at the full rate.

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CREDIT: [TMFONT 1 d #666666 d {Source: Roll Call}]CAPTION: Speaker Foley's profits on initial public offerings

With reporting by Nancy Traver/Washington