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Hot IPOs To WorldCom Execs?

Congress Probes Whether Salomon Smith Barney Offered Hot Tech Offerings To Curry Favor

Jul 10, 2002 | CNN/Money

Two members of Congress are investigating whether the ties between WorldCom Inc. and brokerage firm Salomon Smith Barney led the firm to offer hot initial public offerings to top WorldCom executives, according to a published report Wednesday.

The Wall Street Journal reported that Reps. Paul E. Kanjorski, D-Pa., and Christopher Shays, R-Conn., have written to Salomon's telecommunications analyst Jack Grubman, who testified Monday at the WorldCom hearing before the House Financial Services Committee. The paper said the legislators asked whether the firm sold the hot stock offerings to former WorldCom CEO Bernard Ebbers and other top executives of the telecom in order to curry favor.

During the late 1990s, the IPOs of many hot tech companies soared in the first days of trading, translating into virtually guaranteed windfalls for the investors given the opportunity to buy at the IPO price.

The paper said investigators specifically are looking at the IPO of Rhythms NetConnections Inc., an Internet provider whose offering was handled by Salomon. The company's shares gained 229 percent on their first day of trading in April 1999. The stock eventually peaked at 431 percent above the IPO price a week later before declining. Once tech stock prices collapsed, the company developed financial problems and filed for bankruptcy court protections last year.

The Journal reports that Ebbers was among the investors who bought shares of Rhythms NetConnections at the IPO or thereafter, quoting an unnamed person familiar with the stock offering, though the paper said the number of shares and the price couldn't immediately be determined. Ebbers, who refused to answer questions at Monday's hearing, did not return calls from the Journal seeking comment.

The paper quoted a Salomon spokesman as saying the firm is looking into the information requested by Shays and Kanjorski.

"The firm allocates IPO shares broadly among institutional and retail customers based on a variety of factors," Salomon, a unit of Citigroup, told the paper. "To the extent any WorldCom executives had personal accounts at SSB (Salomon Smith Barney), they, like other SSB individual clients, could have been able to seek IPO investments through their financial consultants, and shares in IPOs would have been allocated consistent with regulatory requirements and internal policies."

Grubman, when questioned by Kanjorski at the hearing about whether WorldCom executives had gotten favored treatment on IPOs, said he couldn't recall.

Lenders weigh $3B for WorldCom

Also Wednesday, the Journal reported that lenders are considering providing WorldCom with a new $3 billion secured credit line.

But the paper said $2.65 billion of it would go to repay lenders who provided that amount in May, before WorldCom disclosed improper accounting. The paper said the remaining $350 million is not nearly enough to cover debt of as much as $3.1 billion that WorldCom is scheduled to repay to bondholders next year.

The move would help the exposure of the banks, who would now have security for much of the lending to WorldCom. The $2.65 billion in loans is unsecured.

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