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A Dangerous IPO Ride

Piggybackers target mutual thrift and insurance customers who have rights to buy shares in the initial public offering of their thrift or insurer. But it's a sticky trap you want to avoid.

Some piggyback rides can be dangerous. Not the kind you give your kids, but the kind you take when you borrow money to invest in a new stock offering and then share the profits with the lender. The practice is legal with some stock buys, but it's banned when it involves mutual thrifts and insurance companies that convert to public-stock ownership.

Piggybackers target mutual customers who have rights to buy shares in the initial public offerings of their thrifts or insurers. Because mutual customers are considered owners, they get a shot at a small slice of the offering and a big opportunity for gains (see "Bank on Thrifts That Go Public," Dec.). Customers may borrow to buy shares, but they can't divvy up the profits with a third-party lender, says Richard Schaberg, a lawyer at Thacher Proffitt Wood in Washington, D.C.

Piggybackers lend money to customers in exchange for some of the expected profits. In some cases, scammers also have the IPO shares registered to an account they control. Piggybacking is prohibited because it cheats other investors out of their shares. Federal authorities last year nabbed five people accused of trying to buy stock in the IPO of NewAlliance Bancshares illegally. They could face fines and other civil penalties and even criminal charges.

That's one ride you want to avoid.