N.Y. Puts Heat On Nacchio Hot IPOs
Former Qwest CEO under scrutiny for alleged improprietyJun 21, 2003 | Rocky Mountain News
In May 2000, former Qwest Chief Executive Joe Nacchio received 10,000 shares of the initial public offering of ONI Systems Corp., a promising California telecommunications equipment company.
It was the definition of a hot IPO: On the first day of trading, shares more than tripled in price, to $82 from $25.
Three months later, ONI announced a multiyear deal with Qwest to help deliver high-speed Internet services to customers in metro markets. ONI shares soared another 15 percent.
Qwest would become one of ONI's top customers, and ONI would become a sweet deal for Nacchio personally. Nacchio sold his 10,000 shares in a series of trades between May 2000 and April 2001, netting $562,756 in profits, according to documents recently released by the New York attorney general's office.
Documents show that Nacchio got hot IPO stock in other telecommunications companies that wound up doing business with Qwest, including Global Crossing, Juniper Networks, Evoke (now Raindance Communications), and Rhythms NetConnections.
Charles Stillman, Nacchio's attorney, said in a statement that "all of Mr. Nacchio's investments were perfectly proper and any suggestion to the contrary is simply untrue."
Many people - from regulators to prosecutors have been raising questions about these kinds of tangled relationships among corporate executives, equipment suppliers and investment banking firms during the frenzied boom of the late 1990s.
The Securities and Exchange Commission is investigating the allocations of low-priced stock that Qwest executives received in such equipment suppliers as Chromatis Networks, CoSine Communications and Tellium.
Nacchio, who left Qwest in June 2002, is still under the cloud of a lawsuit by New York Attorney General Eliot Spitzer, alleging that Nacchio received IPO allocations in exchange for steering Qwest's investment-banking business to Salomon Smith Barney, since renamed for its parent company, Citigroup. Similarly charged in the suit are WorldCom's former Chief Executive Bernard Ebbers, Metromedia Fiber Network Chairman Stephen Garofalo and McLeodUSA's former CEO Clark McLeod.
Qwest founder and director Phil Anschutz, while denying wrongdoing, recently settled an IPO case with Spitzer, agreeing to donate $4.4 million to nonprofit organizations and six law schools. The list of Anschutz's allocations in 57 IPOs wasn't disclosed.
And in a recent landmark settlement with the SEC and Spitzer, the country's major Wall Street investment banks agreed to quit doling out IPO stock to corporate executives.
IPO allocations to favored clients aren't new, but the stock was handed out like candy in the 1990s, and prices often doubled or tripled the first day of trading.
But the key questions that can't be answered from public documents about Nacchio are just who gave him those IPO shares and how involved he was in asking for them. Those answers are important in determining if and how companies may have been trying to curry favor with Nacchio and Qwest.
Hot IPO precedent
Salomon already has been accused of giving hot IPO stock to Nacchio and others in efforts to cement investment banking business.
Companies issuing stock also had programs to allocate shares to "friends and family," and Salomon administered some of those programs, according to SEC documents.
ONI Systems, for example, doled out 960,000 IPO shares under its "directed-share" program, according to regulatory filings, but the individuals who got those shares weren't disclosed.
Charles Elson, director of the University of Delaware's Center for Corporate Governance, sees both cases as problematic.
One has to ask whether the investments influenced business decisions, Elson said. "The best policy is not to do business with the companies that you invest in."
Carr Conway, a former SEC investigator and now forensic accountant at Dickerson Financial Investigation Group in Lakewood, said investigators are always curious to find out whether there is a quid pro quo.
If one were to see a relationship where a person is allowed to reap a benefit, one wonders "what did the other party get out of it," Conway said. He added that this also is a kind of relationship that can be explained easily to a jury.
Recently released SEC documents show that Qwest executives as a group received nearly 1.1 million IPO shares through Salomon between 1996 and 2001, generating profits of more than $9 million. During that period, Salomon received investment-banking fees from Qwest totaling $46.8 million.
A Global Crossing spokeswoman said she couldn't confirm that Nacchio received an allocation directly from Global Crossing, and added that the company's "friends and family" allocations aren't public information. A Raindance Communications spokeswoman also said she couldn't provide information on how Nacchio received his stock in what was then Evoke Communications.
A Juniper spokeswoman said that the company's stock-allocation program was administered by Salomon and that Salomon decided who would be offered the opportunity to get IPO stock.
"The ultimate recipients were and are unknown to Juniper Networks," the spokeswoman said. "It is also worth noting that Juniper Networks' early successes with customers such as Qwest were based purely on the fact that we addressed a very real and acute need."
Former ONI Systems executives didn't respond to an inquiry. Rhythms NetConnections has since liquidated.
It is difficult to determine the exact relationships between Nacchio, the companies that went public and the IPO allocations in part because only partial information has been disclosed.
For example, Nacchio is charged by Spitzer with getting allocations in 42 IPOs from Salomon. Spitzer's office recently released three of five pages listing 23 of those IPOs.
The New York attorney general's office, the SEC, Salomon and Qwest all declined to clarify or provide more information.
Notations on the documents indicated that at least some allocations to Nacchio may have been "friends and family" stock by the company that went public.
For example, Nacchio received 2,000 shares in the IPO of KPNQwest, a joint venture between Qwest and a Dutch telecommunications company. Next to "KPNQwest" on the documents, there is a "Y" with the notation: "F&F allocation of 200 sh)."
Regardless of how Nacchio received the allocations, regulators and prosecutors may have a difficult time making a case that Nacchio or other Qwest executives did anything wrong in taking the stock, legal experts said recently.
"If the receipt of profits was a virtual certainty and certain suppliers caused allocations to be directed toward specific individuals, that could be equated to a payment of a bribe," said Christopher Bebel, a Houston lawyer and former federal prosecutor, in speaking about the Chromatis, CoSine and Tellium deals.
But proving a quid pro quo is extremely difficult and would require documents or other firm evidence, legal experts said.
Elson indicated that regulators might argue under the legal doctrine "corporate opportunity," that the stock allocations really belong to Qwest and its shareholders, rather than the executives for their own personal gain.
"If the IPO allocations constitute a gift, it's something that should go to the company," Elson said. "IPO offerings aren't like a ticket to a baseball game."
But Bebel noted that "under Nacchio, the general counsel's office of Qwest approved that particular business relationship."
The best that regulators may be able to do is argue that Qwest didn't treat or disclose the compensation properly, Bebel said. And that would be an aggressive approach, he said.
Qwest's previous conflict-of-interest policy stated that an employee's direct investment in another company "may create a conflict of interest if the other company has a commercial or equity relationship with Qwest."
The policy called for the company's legal affairs department to approve in advance all direct investments, including "friends and family" programs. But Qwest declined to elaborate or say whether that was followed in all cases.
Now, under a stricter policy put in place late last year under new CEO Richard Notebaert, Qwest employees are prohibited from receiving any stock issued by other companies if the investment opportunity has some connection to Qwest.