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Lawsuit Targets Telecom Execs' Stock Windfalls

Oct 1, 2002 | USA Today

New York Attorney General Eliot Spitzer sued former WorldCom CEO Bernard Ebbers and four other top telecom executives Monday for ''profiteering'' in hot initial public offerings and stock option sales.

Spitzer, who in May forced Merrill Lynch to pay $100 million to settle charges that its stock analysts published biased recommendations favoring the firm's investment-banking clients, says he may pursue similar charges against other executives.

In a 29-page civil lawsuit filed Monday, Spitzer charges that Ebbers, former Qwest chairman Philip Anschutz, former Qwest CEO Joseph Nacchio, Metromedia Fiber Networks Chairman Stephen Garofalo and former McLeodUSA CEO Clark McLeod steered more than $200 million in deal fees to Salomon Smith Barney, the investment-banking arm of Citigroup.

In return, Salomon gave the executives access to thousands of IPO shares, whose value soared after public trading began. Salomon also assigned high ratings to the stocks of the companies those executives headed, which helped inflate the stocks' prices and allowed the executives to cash in on lucrative stock options, Spitzer says.

Spitzer considers the money the executives made ill-gotten gains and is demanding the defendants repay more than $28 million in profits from selling IPO shares and more than $1.5 billion gained from exercising stock options in companies that he claims were hyped by Salomon's former star telecom analyst, Jack Grubman.

Lawyers for the defendants either denied the charges or had no comment. Salomon and Grubman were not named as defendants in the complaint. Spitzer is still negotiating a possible deal to settle charges of conflicts of interest among Salomon research analysts.

Spitzer's move could have far-reaching implications as he held out the possibility of similar lawsuits against other business leaders.

''We are talking about billions of dollars that investors should get back from CEOs,'' he said.

The defendants certainly fared better than their investors, who were largely wiped out. WorldCom and Metromedia have filed for bankruptcy-court protection, while McLeodUSA emerged from it this year. Qwest is trying to avoid bankruptcy, but shares are off more than 95% from their 2000 high.

In one undated e-mail contained in the lawsuit, Grubman complains to a Salomon colleague that he was being forced to keep ''buy'' ratings on stocks of client companies whose share prices were tanking.

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