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Executives sued over their IPO profits

"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."

New York Attorney General Eliot Spitzer

New York Attorney General Eliot Spitzer sued WorldCom Inc founder Bernard Ebbers and four other telecommunications executives, charging they "reaped enormous personal profits" on initial public offerings while steering business to Citigroup Inc.

The civil suit seeks to recover US$28 million the executives allegedly earned from selling IPO shares and US$1.5 billion from sales of stock in their own companies. Besides Ebbers, the suit names Qwest Communications International Inc. board member Philip Anschutz and former Chairman Joseph Nacchio; Metromedia Fiber Network Inc Chairman Stephen Garofalo; and former McLeodUSA Inc Chief Executive Clark McLeod.

As lawmakers and the Securities and Exchange Commission probe securities firms, Spitzer is shifting his focus to executives he says profited personally from their dealings with Citigroup's Salomon Smith Barney Inc. unit while investors saw their shares dwindle in value.

The case sends a message to executives ``that they will not be shielded from personal liability,'' said Ron Geffner, a former SEC enforcement lawyer who is a partner at Sadis & Goldberg LLC.

Spitzer said the executives profited from an "integrated effort" by Salomon and its former telecommunications analyst Jack Grubman to win and retain banking business.

The suit alleges Salomon gave executives valuable, ``nearly risk free'' shares of companies having IPOs. In addition, Grubman maintained high ratings on the executives' companies, boosting the value of their stocks and allowing them to profit when selling shares, the suit said. Neither Salomon nor Grubman is named in the complaint.

Conflicts of interest

"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."

Citigroup spokeswoman Leah Johnson declined to comment on the specifics of Spitzer's suit, citing continuing talks with the attorney general. "We are moving aggressively to resolve questions about past practices and to institute far reaching reforms," said Johnson.

Ebbers' lawyer, Reid Weingarten, said in August: "There is absolutely no evidence that the IPO shares were in return for investment banking business and thus were perfectly legal."

Weingarten didn't return a call and e-mail for comment.

"The claim that Joseph Nacchio steered business to Salomon Smith Barney in return for personal IPO allocations or favorable research reports is totally false," said his lawyer, Charles Stillman. Spokesmen for the other defendants either couldn't be reached or declined to comment.

Spitzer released e-mails from Salomon and Grubman that he said proved stock ratings were influenced by investment banking business. In one e-mail, Grubman referred to some of the stocks that he and the firm had supported as "pigs." Grubman "had no responsibility, nor did he influence, IPO allocations to telecommunications executives," his attorney, Lee Richards, said in a statement. The suggestion that Grubman's research was altered to enrich executives is false, he said.

Misstatements

Spitzer said Grubman wasn't named in the suit because the state is in talks to settle allegations against the analyst and Citigroup.

"Each defendant made misstatements or omissions of material facts regarding the sale of securities to the public" by failing to disclose IPO allocations from Salomon Smith Barney, the suit alleged. The executives unjustly enriched themselves and engaged in "repeated and persistent" fraudulent activity, it said.
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