Re: (Off Topic) Friends and Family Discount -- Legalized Insider Trading?
Stockholders sue Williams execs
By D.R. STEWART World Staff Writer
8/5/00
The defendants bought discounted shares of a Williams business partner, the lawsuit says.
Two Tulsa stockholders are suing top executives of Williams Cos. Inc. and Williams Communications Group Inc. for pocketing more than $40 million in an initial public stock offering of a partner company.
In a case reflective of the fortunes -- and liabilities -- of the new economy, stockholders Jeanette S. Wolfe and Charles V. Wheeler allege that Williams Communications executives Matthew W. Bross, John C. Bumgarner Jr. and unnamed colleagues were permitted to purchase at a steep discount shares in a Silicon Valley startup company. The startup was a company with which Williams had proposed to do business.
The lawsuit, filed Thursday in Tulsa County District Court, claims that Bross, senior vice president and chief technology officer, and Bumgarner, president for strategic investments, respectively, of Williams Communications and several un named executives were negotiating earlier this year with the Silicon Valley company for next-generation switching gear.
The company, ONI Systems Inc. of San Jose, Calif., manufactures fiber-optic switching gear for use in telecommunications networks such as the 33,000-mile network Williams Communications is scheduled to complete in December.
In November 1999, ONI sold 332,000 shares of its capital stock to Bross at a "friends and family" price of $3.30 per share.
The "friends and family" discounts traditionally are extended to relatives of employees of the IPO company. But in recent years, technology start-ups have used discounted stock as an enticement for proposed business partners and their executives.
Shortly after the November sale to Bross, ONI sold 63,316 shares of stock to Bumgarner at $6.32 a share, the plaintiffs claim in the suit.
In December 1999, Williams Communications was allowed to purchase 1.58 million shares of ONI at $6.32 per share, the suit alleges, and in March, Williams Communications agreed to purchase $30 million worth of ONI's gear by June 1.
On June 1, ONI made an initial public offering of its stock at an opening price of $25 a share. The price of ONI stock soared to more than $115 a share at the close of the markets on July 12 before settling lower in the technology sell-off of recent weeks.
When contacted Friday, Williams Communications spokesman Gil Broyles said the company had not seen the lawsuit and could not comment.
ONI closed Friday at $96 a share, down $1.81. Williams Communications closed at $28.31, up 50 cents. Williams closed at $44.06, up 25 cents.
As a result of knowledge gained in the course of their corporate duties, the lawsuit alleges, Bross profited more than $35 million from his ONI investment as of July 12. Bumgarner profited more than $6.5 million as a result of his ONI stock pur chase, the plaintiffs allege.
"As senior officers and director of Williams Communications and Williams, Defendant Bross and Defendant Bumgarner breached fiduciary duties to stockholders of Williams Communications and Williams and to Williams Communications and Williams, as well as their respective duties to act in utmost good faith with respect to the best interest of Williams Communications and Williams and their respective stockholders," the plaintiffs claim. "Defendant Bross and Defendant Bumgarner . . . did breach their fiduciary duties to guard the interests of Williams Communications and Williams, and failure to guard against making and profiting or acquiring any personal benefit or advantage not enjoyed by other stockholders. . . ."
The lawsuit asks the court to order Bross, Bumgarner and the unnamed executives to return their ONI shares, less their costs, to both companies.
Wheeler, one of the plaintiffs, is a Tulsa lawyer who is representing himself and Ms. Wolfe in the case, he said. A former general counsel for Cities Service and Occidental Petroleum, Wheeler has taught law at the University of Tulsa. He is retired.
"These executives exchanged an order that Williams placed with ONI for $30 million in switching gear for the stock described in the petition at bargain prices," Wheeler said in a phone interview. "The gain they realized obviously belongs to shareholders of the corporation for whom they are in a fiduciary position."
The ONI initial public offering is not the first in which Williams executives have profited.
Another startup, Sycamore Networks Inc., a developer and marketer of optical networking products based in Chelmsford, Mass., had its initial public offering last October. After opening at $38 a share, the stock soared to more than $200 a share, aided by investors' knowledge that its single customer, Williams Communications, had placed orders for $400 million of its products.
Bross and several Williams Communications executives also profited from the Sycamore's public offering since they bought stock at the "friends and family" pre-IPO price of $38 a share.
Sycamore stock closed Friday at $130 a share, up $6.25.
Williams Communications President and Chief Executive Howard Janzen, when asked about "friends and family" deals earlier this year, said they "cemented relationships" between suppliers and customers in the costly arena of new technology.
"But the issue is that the numbers have gotten so big that companies are amazed at how big the rewards are," Janzen said in March.
Criticized for the Sycamore deal, Williams' board of directors recommended that company executives no longer be allowed to participate in "friends and family" transactions. In April, a corporate policy was adopted banning employees from accepting such shares or any compensation for serving on outside boards and advisory panels.
"There has been a real sensitivity about the perception it leaves when (`friends and family') stock appreciates so rapidly," Broyles said in March. "It was thought we would limit participation -- but then it was thought that we should bar it entirely. It's more of an appearance of a conflict of interest."
D.R. Stewart, World business writer, can be reached at 581-8451 or via e-mail at don.stewart@tulsaworld.com.
Copyright © 2000, World Publishing Co. All rights reserved.
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Williams investors sue again
By D.R. STEWART World Staff Writer
8/9/00
In their second lawsuit against the company in the past week, two Tulsa shareholders of Williams Cos. Inc. and Williams Communications Group Inc. allege that company executives made millions of dollars from an initial public stock offering of a partner company.
The case, filed Monday in Tulsa County District Court by plaintiffs Jeanette S. Wolfe and Charles V. Wheeler, alleges that Williams Communications executives profited personally by purchasing discounted stock of a Massachusetts-based company before it went public.
After the stock was issued to the public, its price soared many times above the discounted level paid by the Williams Communications executives, the suit claims.
Involving Sycamore Networks of Chelmsford, Mass., the latest case mirrors the lawsuit Wolfe and Wheeler filed Thursday against the same companies and a slightly different cast of executives.
The case filed last week involves the public stock offering of ONI Systems Inc. of San Jose, Calif., which manufactures fiber-optic switching gear for telecommunications networks such as that operated by Williams Communications.
In the ONI case, the plaintiffs allege that Williams Communications executives Matthew W. Bross, John C. Bumgarner Jr. and unnamed executives pocketed more than $40 million from discounted ONI stock that soared after it was offered in public trading.
Named as defendants in the case filed this week are the two companies, Matthew W. Bross, Wayne Price and unnamed executives. Bross is senior vice president and chief technology officer, and Price is former vice president of network architecture of Williams Communications Group. Bumgarner, who was named in the plaintiffs' suit involving ONI stock, is not named in the Sycamore stock case.
Price resigned his post at Williams Communications last fall. He is now the vice president of network architecture for San Jose-based Valiant Networks, a company he founded. Price did not return calls seeking comment.
According to the lawsuit, Williams Communications -- with the advice of Bross and Price -- decided to buy in March 1999 $400 million of Sycamore's optical networking products, which the executives estimated would provide a 10-fold improvement in performance, cost or ease of use compared with existing products.
In September 1999, Bross, Price and unnamed Williams Communications engineers who had evaluated Sycamore's products were offered Sycamore stock at a "friends and family" discount price of $38 a share, the suit claims.
The "friends and family" discounts traditionally are extended to relatives of employees of the IPO company. In recent years, however, technology startups have used discounted stock as an enticement for proposed business partners and their executives.
Executives at Williams Communications and other high-tech companies say discounted stock is not, on its face, a conflict of interest.
In the risky arena of high-tech research and development, a "friends and family" stock deal is a way for two companies to cement partnerships as they jointly develop new technology, executives say.
"But the issue is that the numbers have gotten so big that companies are amazed at how big the rewards are," Williams Communications president and chief executive Howard Janzen said in March.
On Oct. 22, a month after the Williams Communications executives purchased their Sycamore stock, Sycamore had its initial public offering. The stock soared from an opening price of $38 to $270 per share, and hovered between $200 and $250 per share for the first day of trading, the plaintiffs state.
After rising to more than $300 a share in the next few months, Sycamore stock underwent a three-for-one stock split approved by the company's board of directors in January.
Sycamore stock closed Tuesday at $132.63 per share, down 31 cents.
"Defendant Bross' share of Sycamore surged in value to nearly $1 million," the suit states. "The unknown engineers who worked for Bross got options that turned out to be worth several hundred thousand dollars. Defendant Price . . . received not only "friends and family" stock of Sycamore worth $500,000, but also got a separate stash of options that amounted to almost $10 million. Price also agreed to serve on Sycamore's technical advisory board."
The plaintiffs allege that Bross, Price and the unnamed engineers breached their fiduciary duties to the companies and the stockholders by profiting from personal advantages not enjoyed by other stockholders.
The suit also asks the court to compel the defendants to return their Sycamore profits to the companies.
"Defendant Bross and Defendant Price, and each of them, must be made to disgorge themselves of all profits from their ownership of said shares of Sycamore stock and options to purchase Sycamore stock (that) they acquired by virtue of their use of proprietary information of Williams Communications and Williams, abusive uses of gross conflicts of interests, their wrongful personal misuse of the financial backbone of Williams and their usurping opportunities to Williams Communications and Williams," the lawsuit states.
Criticized for the Sycamore stock transactions, Williams' board of directors in March recommended that company executives no longer be allowed to participate in "friends and family" deals. In April, a corporate policy was adopted banning employees from accepting such shares or any compensation for serving on outside boards or advisory panels.
Neither company, however, attempted to recover any of the Sycamore proceeds from Bross, Price or the engineers, the suit alleges.
Williams Communications spokesman Gil Broyles said the company has not seen a copy of the lawsuit.
"We would withhold comment on any matter in litigation," he said.
Wheeler, a retired corporate counsel for Cities Service who is serving as the plaintiffs' attorney, said he and Wolfe believe there are more Sycamore and ONI cases out there.
"These executives made big money, and I have an idea that this kind of thing is rampant is the high-technology industry," he said.
On Wall Street Tuesday, Williams stock closed at $46.69, up 94 cents a share.
Williams Communications closed at $30, up 63 cents.
D.R. Stewart, World business writer, can be reached at 581-8451 or via e-mail at don.stewart@tulsaworld.com.
Copyright © 2000, World Publishing Co. All rights reserved.
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Williams gets OK on spinoff
By World's own Service
8/9/00
Tulsa-based Williams said Tuesday the Internal Revenue Service has issued a favorable ruling on the company's proposed tax-free spinoff of its communications business to Williams' shareholders.
The ruling would permit a tax-free distribution of Williams Communications Group Inc. stock to shareholders in what commonly is known as a spinoff transaction. Each Williams shareholder would get a proportionate number of WCG shares.
Williams owns about 85 percent of Williams Communications, but the parent company announced July 24 that it plans to separate its communications and energy businesses in an effort to beef up the value of both.
Dividing the companies would not necessarily lead to downsizing at either business or a slower job growth by either in Tulsa, officials said. Together, both operations employ more than 5,000 locally.
The action is expected to take place within 12 months in order to preserve the ruling, unless it is extended or modified, said Keith Bailey, chairman, president and chief executive officer of Williams.
"This important ruling allows us to move forward with the assurance that, should our board ultimately approve the separation, it will be a tax-free event for our shareholders," Bailey said.
"As our prior announcement made clear, tax treatment was an important predicate in the board's decision-making process. We can now turn our attention to the myriad other details that must be resolved prior to a final decision to move further down this path."
Bailey declined to elaborate on the company's plans.
"We would not expect to make any progress reports as we move along, and we expect that our next formal communication on this matter will be when our board makes its final decision," he said.
Williams is a major player in both the energy and telecommunications businesses. On the energy side, the company is a leading transporter of natural gas in the United States. In telecommunications, it plans to finish its 33,000-mile fiber-optic network this year.
The company has made major announcements recently concerning both operations.
Last Thursday, it unveiled plans to buy TransCanada PipeLines' gas-gathering and processing business in a deal reported to be in the neighborhood of $780 million. On the same day, Williams Communications Group sold $1 billion in high-yield bonds to provide capital to equip and complete its fiber-optic network.
Shares of the parent company closed up 98 cents at $46.69 on Tuesday, while Williams Communications gained 63 cents to finish at $30.
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July 13, 2000
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Williams Is Kingmaker
Among Telecom Start-Ups
By SCOTT THURM and MARK MAREMONT
Staff Reporters of THE WALL STREET JOURNAL
For many start-up makers of communications equipment, all roads lead to Tulsa, Okla.
Tulsa is home to Williams Communications Group Inc., a new-era long-distance network that is making a name as a big buyer of innovative equipment. More than a half-dozen start-ups list Williams as among their first customers. In the tight-knit telecommunications world, a Williams purchase order has become a key reference for recruiting other customers and a big boost toward a successful initial public offering.
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