Some Average Investors May Be Shut Out of GM's IPO

Just two years after a taxpayer bailout salvaged General Motors, some of the nation’s largest retail brokerage firms are apparently being shut out of what is poised to be a lucrative investment opportunity as the auto company goes public.


Charles Schwab, TD Ameritrade, and E*Trade are not accepting client orders for GM shares at the moment because they do not expect to receive stock allocations when the company goes public next week, according to investors and brokerage-firm employees.

Other big retail brokerages, such as Morgan Stanley , are expected to get shares, however, as are big institutional investors and hedge funds.

“TD Ameritrade will not be participating in the GM IPO offering, as we have been informed that we will not receive an allocation of shares,” said a company spokeswoman in an e-mailed statement. “We have several relationships with various underwriting firms for various products, and in this case the underwriting firm is not allocating shares for this offering.”

Schwab has taken a similar position, according to a source there and an investor who sought GM shares. And with just a few days before GM shares are expected to price on the evening of Nov. 17, a notice posted on E*Trade’s investor web site states that there are no “current offerings” of IPOs available to customers at this time.

The lack of available shares is a disappointment to some potential retail investors, who are frustrated that, after federal TARP funds helped a struggling GM in the depths of the financial recession, they may not be able to participate in what is expected to be a good money-making opportunity.

“I really like the GM IPO, I think it’s going to do well,” says Anand Marphatia, a 51-year old father of two who in Houston who lost his job in the recession and now invests using a Schwab account. He says his requests to Schwab for GM shares have been rebuffed: “I’d like to get in, and I can’t.”

GM’s IPO shares are widely expected to price at a level above the $26 to $29 range that has been listed in the company’s offering documents, and many investors expect even a higher share price to trade up in the aftermarket. Mutual funds, hedge funds, and some sovereign-wealth funds are expected to receive the bulk of the shares on offer next week. But some acknowledge that they are unlikely to get stock allocations as large as they would like.

One New York hedge-fund manager, who attended the GM road show meeting with investors early this week, calls the IPO shares “free money,” adding that “we’ll take as much as we can get.”

In sorting out who receives shares next week, GM’s lead underwriters,Morgan Stanley and J.P. Morgan, must strike a delicate balance: combining traditional buy-and-hold investors, an increasingly shallow pool, with more actively-trading investors who may sell the stock quickly. Including small investors has been a priority for the U.S. Treasury, GM’s largest shareholder, as well as the auto company.

Citing SEC regulations, a Treasury spokesman declined to comment on the details of the offering process. But in government guidelines released in September, the agency outlined its view of the retail involvement: "We expect that interested retail purchasers will be given ample opportunity to participate, consistent with appropriate commercial practices aimed at maximizing our return and creating a stable trading market for the shares."

All 21 underwriters of the GM deal are expected to receive stock allocations next week, say the people familiar with the matter. Some, like Morgan Stanley, have large retail brokerage networks whose clients will receive part of the firm’s allotment. Other retail brokerages who are not named in the prospectus are likely to receive allocations also, said these people, although at the moment, Schwab, Ameritrade and E*Trade don’t appear to be part of that syndicate.

Still, with several days to go until the GM offering’s pricing late Wednesday, the situation is fluid, and retail investors who believe they are now being shut out may yet have an opportunity to get shares, these people added.