June 11 (Bloomberg) -- Morgan Stanley and Credit Suisse Group AG are among the banks that won preliminary approval of a settlement of an investor lawsuit over initial public offerings of technology stocks at a fraction of the sum once sought.

The banks will pay $586 million to settle claims stemming from the bursting of the Internet bubble in 2000, which led to lawsuits against 309 technology companies and 55 underwriters, under the tentative settlement approved by U.S. District Judge Shira Scheindlin in Manhattan in a 107-page opinion yesterday.

Plantiffs’ lawyers led by Melvyn Weiss, who has since been jailed in an unrelated kickback scheme, once demanded $12.5 billion to settle the case. The lawyers are asking for one-third of the recovery in legal fees and another $56 million in expenses. The suit was brought on behalf of investors in the technology stocks.

The “investment banks effectively won,” said Howard Sirota, a lawyer for the investors. He said the settlement was “disappointing” and that plaintiffs’ attorneys did “the best we could given the abject failure” of regulators to “prosecute or even regulate the major investment banks and the Supreme Court’s grant of immunity from the antitrust laws.”

Scheindlin scheduled a hearing for Sept. 10 to consider final approval of the agreement. The fractional payout may reflect the fiscal distress of the world’s investment banks following the credit-market collapse, she said.

Economic Environment

“It cannot be discounted that the current economic environment has changed the ‘ball game’ with respect to what plaintiffs could expect even with a verdict,” Scheindlin wrote in an opinion finding the settlement to be reasonable. “Simply put, plaintiffs cannot expect to receive a similar recovery to that they had hoped to receive during more bullish years.”

The recovery is roughly two percent of potential trial damages, said Stanley Bernstein, the lead lawyer for the investors in the case. “We hope to bring this long litigation to a close and get the settlement funds out to class members as soon as possible,” Bernstein said.

Gandolfo DiBlasi, a lawyer for the banks, declined to comment. Jack Auspitz, an attorney for the Internet startups that were sued, said the issuers were “pleased” with the preliminary approval.

The cases stem from the boom and collapse of the technology-stock market in 2000. Investors in 309 companies that went public claimed underwriters including Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. manipulated the IPO market for technology firms, whose value soared to record heights before collapsing. None of those three firms remain as independent investment banks.

IPO Frenzy

Dozens of banks including Goldman Sachs Group Inc. and other financial firms denied wrongdoing.

In the IPO frenzy of the late 1990s, banks raised about $130 billion for companies they brought to market while generating billions in fees. Investors who received IPO shares profited from selling stock as prices soared. Many of those stocks later plummeted and the companies declared bankruptcy.

Investors who bought shares after trading began said the banks had secret arrangements requiring IPO clients to buy more stock later at higher prices. That created artificial demand that drove up prices until they collapsed, investors said. The earliest lawsuits were filed in 2001. Settlement talks went on for years.

JPMorgan Chase & Co. agreed in 2006 to pay $425 million to settle its portion of the case. That settlement was scuttled after a federal appeals court overturned the approval of the case as a class-action, or group, lawsuit, saying it must proceed on behalf of fewer investors.

Internet startups such as Razorfish Inc. and Red Hat Inc. agreed in 2003 to pay $1 billion to settle. That deal was tossed out as a result of the same appellate ruling.

Objectors

“Potential objectors” to the settlement “may argue that the $586 million settlement is much less than the $1 billion guarantee that the court had previously preliminarily approved in 2005,” Scheindlin wrote.

She said that in light of the risks in going forward with the lawsuit, “including the risks plaintiffs face establishing liability and damages and maintaining the class actions through trial, the settlement is reasonable.”

The case is In Re Initial Public Offering Securities Litigation, 21-MC-92, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in U.S. District Court in Manhattan at dglovin@bloomberg.net.

Last Updated: June 11, 2009 12:32 EDT