New York State Sues 5 Telecom Executives Over IPO DealsOct 1, 2002 | The Los Angeles Times
Five telecom industry executives, including former WorldCom Inc. chief executive Bernard J. Ebbers, were sued Monday by New York state on charges that they steered business to a big Wall Street brokerage in exchange for hot stock offerings.
The civil suit by New York Attorney General Eliot Spitzer alleges that the men directed corporate finance work for their firms to Salomon Smith Barney, the brokerage arm of Citigroup Inc., in return for sweetheart deals on initial public stock offerings in recent years.
Wall Street's practice of personally rewarding executives with coveted IPOs is known as "spinning" and is the subject of several probes by state and federal regulators. Spitzer is the first regulator to formally bring charges.
The complaint seeks the disgorgement of $28 million in spinning profits made when the executives sold their IPO shares.
The suit also seeks disgorgement of an additional $1.5 billion the executives reaped by selling shares of their own companies. Spitzer alleges those gains were ill-gotten because Salomon analysts touted the companies' shares to the public as part of the scheme.
The other executives are Philip F. Anschutz, Los Angeles sports mogul; Joseph Nacchio, former chief executive of Qwest Communications International Inc.; Stephen Garofalo, chairman of Metromedia Fiber Networks Inc.; and Clark Mc-Leod, former CEO of McLeod USA Inc.
The men were charged with fraud, failure to disclose financial dealings and personal enrichment at the expense of their companies.
"The CEO was personally bought off by being given IPO allocations," Spitzer said at a news conference. "It was wrong. It shouldn't have happened."
The suit seeks the disgorgement of the money to the executives' companies.
Though some experts doubted the strength of Spitzer's case, others said he was on firm legal ground.
"It seems there was an expectation of a quid pro quo," said Jonathan Macey, a Cornell University securities-law professor. "Why else would (Salomon) give these IPOs to (the executives)? There were plenty of other people clamoring for them."