New York's Spitzer Sues Executives Over IPO Profits (Update5)
By David Wells, Philip Boroff and Stephen Cohen
New York, Sept. 30 (Bloomberg) -- New York State Attorney General Eliot Spitzer sued former WorldCom Inc. Chief Executive Bernard Ebbers and other executives to recover profits from initial public offering shares that the executives received after steering banking business to Salomon Smith Barney Inc.
Qwest Communications International Inc. board member Philip Anschutz and former Qwest Chairman Joseph Nacchio; Metromedia Fiber Network Inc. Chairman Stephen Garofalo; and Clark McLeod, former chief executive of local telephone company McLeodUSA Inc., were named as defendants.
As lawmakers and the Securities and Exchange Commission probe securities firms, Spitzer is shifting the focus of his investigation to the company executives who earned millions of dollars as investors saw their shares dwindle in value.
``This case exposes further conflicts of interest on Wall Street,'' Spitzer said. ``The spinning of hot IPO shares was not a harmless corporate perk. Instead, it was an integral part of a fraudulent scheme to win new investment banking business. The loser was the small shareholder.''
Spitzer said the executives earned between $16 million and $1.4 billion by selling shares in their own companies, including those received in stock options. Salomon kept favorable ratings on the stocks so the executives could sell at high prices, he alleged.
IPOs
The attorney general said his investigation revealed that from September 1998 through February 2002, Salomon distributed shares of 21 IPOs to WorldCom executives, including Ebbers, who made more than $11 million on the deals. During the same period, Salomon received $107 million in fees for advising on 23 investment banking transactions.
From March 1996 to March 2001, shares of 57 IPOs were distributed to Qwest executives, he said. Anschutz made more than $5 million and Nacchio made more than $1 million from the grants. In the same period, Qwest paid Salomon $37 million, the suit charges.
Salomon provided shares in 37 IPOs to Garofalo, who earned more than $1.5 million as his firm paid the investment bank $47 million. McLeod made more than $9 million as his firm paid Salomon more than $49 million for 16 deals.
``The executives received huge perks from a vendor who sought their business,'' Spitzer said at a news conference in New York. ``This clearly was unjust enrichment and it violated the disclosure requirements.''
Citigroup spokeswoman Leah Johnson declined comment on the specifics of Spitzer's suit, citing ongoing talks with the attorney general. ``We are moving aggressively to resolve questions about past practices and to institute far reaching reforms,'' said Johnson.
In August, Citigroup denied it did anything wrong and said the executives who received the shares were brokerage clients.
Ebbers' lawyer, Reid Weingarten, said at the time: ``There is absolutely no evidence that the IPO shares were in return for investment banking business and thus were perfectly legal.''
Weingarten didn't immediately return a call and e-mail for comment.
Martin Act
Spitzer is armed with the Martin Act, an 80-year old state law that gives him authority to prosecute fraud without having to prove intent. Authorities using the law don't have to prove perpetrators willfully did something illegal, which federal law requires. The statute is tougher than most state and federal securities laws because it calls for civil and criminal penalties including jail terms.
The SEC, the federal agency that regulates Wall Street, can only pursue civil penalties.
Spitzer's suit sends a message to executives ``that they will not be shielded from personal liability,'' said Ron Geffner, a former SEC enforcement lawyer and now a partner at Sadis & Goldberg LLC.
Merrill Case
The New York attorney general previously accused Merrill Lynch & Co. of conflicts of interest that compromised its stock research. The largest securities firm by capital in May settled Spitzer's civil lawsuit for a $100 million fine and a pledge that its bankers would no longer have a say in the pay of analysts.
Spitzer said last week that he could have won a criminal conviction against Merrill, and stopped short because he wants to reform Wall Street, not put its biggest firms out of business.
He's probing Citigroup's IPO allocations, and also investigating whether its former telecommunications analyst, Jack Grubman, published flattering research to win banking business.
Spitzer said today that Citigroup and Grubman aren't named in the complaint because the state is in talks to settle allegations against them. Credit Suisse First Boston and Goldman Sachs Group Inc. are also in talks with the Securities and Exchange Commission to resolve investigations into whether their stock research was compromised by conflicts of interest, according to people familiar with the situation.
Congress
Documents released by the House Financial Services Committee in August show corporate executives who directed their investment- banking business to Citigroup gained IPO shares courtesy of the firm and sold them, often for a gain. Congress is investigating allegations that the gifts were given in exchange for business.
Marcia Horowitz, a spokeswoman for Nacchio at Rubenstein Associates, had no immediate comment. Jim Monaghan, a spokesman for Anschutz, did not immediately return a call seeking comment.
Garofalo's attorney, Barry Bohrer, didn't return a phone call. McLeodUSA spokesmen didn't return calls. McLeod retired as chairman of the company in April. A home number for McLeod couldn't immediately be obtained.
``It's hard to believe CEOs were willing to risk their positions for something that is so clearly not in the best interest of their shareholders,'' said Brian Bruce, a money manager at PanAgora Asset Management, owner of Qwest and WorldCom shares. ``I have a hard time fathoming that it hasn't been made illegal,'' he said of allocating IPOs to executives. |
