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Executives Sued for IPO Profits

Wall Street: Spitzer charges five, including Anschutz and Ebbers, with giving underwriting business to a brokerage in return for hot stocks.


NEW YORK — Five telecom industry executives, including Los Angeles sports mogul Philip F. Anschutz and former WorldCom Inc. chief Bernard J. Ebbers, were sued Monday by New York state on charges that they steered business to a big Wall Street brokerage in exchange for hot stock offerings.

The civil suit by New York Atty. Gen. Eliot Spitzer alleges that the men directed corporate finance work for their firms to Salomon Smith Barney, the brokerage arm of Citigroup Inc., in return for sweetheart deals on initial public stock offerings in recent years.

Wall Street's practice of personally rewarding executives with coveted IPOs is known as "spinning" and is the subject of several probes by state and federal regulators. Spitzer is the first regulator to formally bring charges.

The complaint seeks the disgorgement of $28 million in spinning profits made when the executives sold their IPO shares.

The suit also seeks disgorgement of an additional $1.5 billion the executives reaped by selling shares of their own firms. Spitzer alleges that those gains were ill-gotten because Salomon analysts touted the companies' shares to the public as part of the scheme.

The other executives named are Joseph Nacchio, former chief executive of Qwest Communications International Inc.; Stephen Garofalo, chairman of Metromedia Fiber Networks Inc.; and Clark McLeod, former CEO of McLeod USA Inc.

Some legal analysts said the allegations may be difficult to prove, and that Spitzer may be more interested in using the evidence to press his broad conflict-of-interest investigation against Salomon.

Spitzer said the executives violated securities laws. "The CEO was personally bought off by being given IPO allocations," he said at a news conference. "It was wrong. It shouldn't have happened."

The men were charged with fraud, failure to disclose financial dealings and personal enrichment at the expense of their firms. The suit seeks disgorgement of the gains to the companies.

Attorneys for Ebbers and Nacchio denied the charges.

Jonathan Macey, a Cornell University securities-law professor, said Spitzer's case is on firm legal ground. "It seems there was an expectation of a quid pro quo," Macey said. "Why else would [Salomon] give these IPOs to [the executives]? There were plenty of other people clamoring for them."

The executives clearly would have broken the law if they had accepted cash in a suitcase in return for sending business to another firm, Macey said. "The only twist is that instead of money in a suitcase the money is in these hot IPOs."

Spitzer stressed that under New York's tough securities laws he does not have to prove an explicit deal between Salomon and the executives--just a failure to disclose the stock gains to investors.

Spinning has been widespread on Wall Street for years but has come under intense scrutiny in the last year amid the host of financial scandals that have rocked Wall Street and corporate America.

Documents released by congressional investigators in August revealed that Ebbers earned $11 million in profits on 21 IPO shares allocated to him by Salomon between 1996 and 2000.

Anschutz, former chairman of Qwest, received shares in 57 IPOs, earning $5 million, Spitzer's complaint said. Nacchio earned more than $1 million from 42 IPOs, the suit says. Garofalo took part in 37 IPOs, earning $1.5 million. McLeod made $9 million on 32 deals.

Reid H. Weingarten, an attorney for Ebbers, said his client had no quid pro quo with Salomon. "These were not perks. He was willing to take the risk, but there were no guarantees," Weingarten said. "He also didn't feel he had to give any business to [Salomon]."

Charles Stillman, an attorney for Nacchio, said in a statement that the allegations were "totally false" and that Nacchio will be "completely vindicated."

A spokesman for the Anschutz Corp. said the IPO shares went to Anschutz's more than 100 companies and that Anschutz himself did not personally receive any IPO shares. The firm said the suit is "absolutely without merit."

Garofalo's attorney declined to comment. McLeod couldn't be reached.

Salomon earned $240 million in investment-banking fees from the executives' companies in the late 1990s, the suit said.

Spitzer's suit grew out of his office's broad investigation of Salomon and its stock analysts. Along with other regulators, Spitzer is probing whether analysts at Salomon and other big Wall Street firms hyped stocks to please executives of the subject firms, in the hope of winning banking work.

Much of Spitzer's suit is taken up with details about the practices of Salomon and its former top telecom analyst, Jack Grubman. The complaint includes several bluntly worded e-mails from Salomon brokers deriding Grubman's bullishness and bemoaning the losses suffered by investors after many hyped telecom stocks collapsed.

"Grubman is an absolute disgrace to our firm as an 'analyst' ... [and] the damage he has caused to [small investors] is a disgrace," one broker said in an e-mail.

The suit also states that top Salomon officials expressed worries about analyst conflicts of interest, but did not remedy them.

John Hoffman, head of Salomon's global equity research, noted at a senior management meeting apparently in early 2001 that the firm had no "sell" ratings and only one "underperform" rating on the 1,179 stocks it covered. In a handwritten note, he labeled that "ridiculous on its face."

Spitzer did not charge Salomon in his suit, probably because Spitzer is in talks with the firm to resolve his investigation, analysts said. Likewise, the suit does not charge Grubman.

Salomon refused to comment Monday. Grubman's attorney said that the former analyst played no role in IPO allocations and that his recommendations reflected his "honestly held views."

Spitzer probably disclosed the allegations against Salomon to put public pressure on the firm to acquiesce to his settlement demands, analysts said.


Staff writer James S. Granelli contributed to this report.

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