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NASD Probes Salomon IPOs

Agency Looks Into Whether Brokerage Allocated Hot IPOs To Executives To Land Their Firms' Business

Aug 16, 2002 | CNN/Money

The National Association of Securities Dealers has evidence that Salomon Smith Barney doled out shares of hot initial public offerings to the personal brokerage accounts of corporate executives in a possible attempt to land business from the executives' firms, according to a published report Friday.

The news of the NASD investigation into Salomon's IPO allocation follows the resignation of Jack Grubman, the firm's high-profile telecom analyst who left the company amid allegations that he hyped certain telecom stocks to help Salomon get investment banking deals.

The NASD probe focuses on the practice of "spinning," where executives receive hot IPO shares below market prices and then sell them on the day of the IPO for quick profits, according to the Wall Street Journal.

The "spinning" practice violates the NASD's "Free-Riding and Withholding Rule," which is meant to ensure that securities firms not use IPOs to lure executives to direct future business to the firms, according to the paper.

In a statement released late Friday, Salomon Smith Barney called the Journal report "wrong," saying that the NASD's probe was industry-wide and that the group had not yet made any findings.

"We have a clear policy against quid pro quos ("spinning") in which IPO allocations are given to executives in exchange for investment banking business," the firm said. "If we find any evidence that anyone violated these rules, we will deal with them swiftly and appropriately."

Last month, Congressional investigators asked Grubman if Salomon handed out IPO shares to telecom executives, such as WorldCom's former CEO Bernard Ebbers. Grubman responded "I don't recall, I'm not saying 'no.' I'm not saying 'yes.'"

A former Salomon broker, David Chacon, filed a suit in a Los Angeles court that alleges Ebbers did indeed receive IPO shares of telecom firm Rhythms NetConnections Inc., which jumped 229 percent on its first day of trading, the Journal reported.

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