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N.Y. Sues Ex-Worldcom CEO Over IPOs

Sep 30, 2002 | AP

The New York attorney general sued former WorldCom chief executive Bernard Ebbers and four top executives of other telecommunications companies for allegedly taking profits in initial public offerings without disclosing potential conflicts of interest.

Attorney General Eliot Spitzer alleges that Qwest Communications, WorldCom, Metromedia Fiber Networks and McLoad USA steered underwriting business to Salomon Smith Barney in exchange for giving the executives access to lucrative IPO shares. Once the IPO share prices soared in trading, the stocks were often sold to result in millions of dollars of personal profits for the executives, Spitzer said.

Spitzer also says the deal presumed that Salomon Smith Barney would deliver favorable stock ratings for the executives' companies as an inducement and reward for obtaining the investment banking business.

"The spinning of hot IPO shares was not a harmless corporate perk," Spitzer said. "Instead it was a integral part of a fraudulent scheme to win new investment banking business."

In the suit, Spitzer names former Ebbers, Qwest Communications chairman Philip Anshutz, former Qwest CEO Joseph P. Naccio, Metromedia Fiber Networks chairman Stephen Garofalo and former McLoad USA CEO Clark McLeod.

The executives are accused of failing to disclose their companies' underwriting relationship with Salomon Smith Barney as required by state law.

The suit is part of Spitzer's investigation of conflicts of interests at brokerages that sought investment banking business from companies while publishing inflated ratings of their stocks.

The suit claims Ebbers made more than $11 million from several dozen IPOs in the late 1990s.

WorldCom, which owns the nation's second largest telephone company MCI, did not immediately return a call seeking comment.

Last week, Salomon agreed to pay a $5 million fine to settle charges star analyst Jack Grubman issued misleading research reports about a telecommunications company that ended up filing for bankruptcy.

In the late 1990s, investors big and small wanted a piece of the IPO action believing the IPO guaranteed big profits. But while small, individual investors sought IPO shares, few did. IPOs became a marketing tool for investment bankers, who underwrote the stock offerings for companies and had most of the control over how they were dispersed. Many used the shares to woo clients and win more lucrative bank business.

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