$11 Million Profit for Ebbers on IPO Deals
Broker Let WorldCom CEO Buy Hard-to-Get Shares
By Ben White
Washington Post Staff Writer
Saturday, August 31, 2002; Page E01
washingtonpost.com
NEW YORK, Aug. 30 -- Former WorldCom Inc. chief executive Bernard J. Ebbers made $11 million in profit selling shares in hot initial public offerings awarded to him in the late 1990s by the Wall Street firm his company did business with, according to records of the trades.
Ebbers's gains came as WorldCom was paying Salomon Brothers and its successor firm, Salomon Smith Barney, hundreds of millions of dollars in investment banking fees to finance the acquisition campaign that Ebbers undertook to build a telecommunications giant. WorldCom collapsed into bankruptcy because of accounting improprieties earlier this summer.
The documents, released today by the House Financial Services Committee, show Ebbers made most of his IPO profits -- $10.6 million -- on hot tech stocks before 1997, when Salomon became a retail broker with many smaller customers who hungered for the hard-to-get shares.
As was often the case in the technology and telecommunications boom of the late 1990s, shares in many of these firms soared in the first days of trading, allowing Ebbers to quickly sell them for significant gains.
"This is another example of how insiders were able to game the system at the expense of the average investor," Rep. Michael G. Oxley (R-Ohio), chairman of the committee, said in a statement.
Officials at Salomon Smith Barney, a unit of Citigroup Inc., strongly denied any improper correlation between its banking fees and the IPO allocations to Ebbers and others. They said Ebbers and other executives got the shares because they were major brokerage clients, a practice allowed by securities laws.
The documents show Ebbers was given the opportunity to purchase low-priced IPO shares in firms such as Qwest Communications International Inc., Metromedia Fiber Network Inc., Nextlink Communications Inc. (now XO Communications) and McLeod Inc.
For instance, Ebbers was given the opportunity to purchase 205,000 shares in Qwest Communications on June 24, 1997, at an offering price of $22 per share. He began selling the shares on June 27 at $28.75, ultimately banking nearly $2 million on the stock.
Shares in such hot IPOs were virtually impossible for average investors to get, leading regulators and lawmakers to question whether stricter allocation regulations should be enacted.
Rep. John J. LaFalce (D-N.Y.), the House Financial Services Committee's ranking Democrat, said in a statement that the new information "emphasizes the need to substantially review market practices regarding the distribution of IPO shares. The fact that investment banks can hand out IPO shares to individual clients who generate more underwriting business for the banks creates potential conflicts of interest across the entire investment banking industry that we cannot simply ignore."
Officials at Salomon Smith Barney have said they will consider enacting new IPO policies.
"We recognize that regulatory standards are evolving," Citigroup attorney Jane C. Sherburne wrote in a letter to the committee today. "We welcome this change and we intend to be a leader in helping bring this change about."
Sherburne also noted that the bulk of the allocations -- and the profits -- came before Salomon Brothers, a firm that dealt mainly with institutions and wealthy individuals, merged with Smith Barney, a large retail brokerage.
Reid Weingarten, an attorney for Ebbers, said there was nothing illegal about the IPO allocations.
"Putting aside that IPO investments are inherently risky," Weingarten said, "that Mr. Ebbers lost money on some of the investments, that he held on to many of the investments for a considerable period of time, that IPO investment opportunities for good customers of banks is utterly routine, the key here is that there is absolutely no evidence that the IPO shares were given in return for banking business and thus were perfectly legal."
While there is no law barring brokerage firms from awarding IPO shares to their best clients, industry regulations prohibit "spinning." That is the practice of allotting IPO shares to the private brokerage accounts of top executives in return for banking business from the executives' firms so the executives can quickly sell, or spin, the shares after they rise on the open market.
Because there was a lag of days, and in some cases months, between the time Ebbers was awarded the shares and the time he sold them, a committee spokeswoman said it did not appear that illegal spinning had occurred.
In addition to Ebbers, the documents show that Stiles A. Kellet Jr., a WorldCom director, made around $200,000 on IPO shares and that former WorldCom chief financial officer Scott D. Sullivan, who was indicted on criminal charges this week, lost around $10,000 on IPO shares awarded by Salomon.
In addition to the allocation of IPO shares, state, federal and industry investigators are probing the relationship between WorldCom and former Salomon Smith Barney telecommunications analyst Jack Grubman, who was close to Ebbers. Grubman is also the subject of several investigations. |
