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N.Y. Sues Execs

Oct 1, 2002 | The Rocky Mountain News

New York Attorney General Eliot Spitzer sued Qwest founder Philip Anschutz and former Chief Executive Joe Nacchio, along with three other telecommunications executives, Monday for more than $1.5 billion that he claims they earned in fraudulent stock sales.

Painting a picture of shadowy intrigue, Spitzer claims Anschutz, Nacchio and the others allowed New York investment banker Salomon Smith Barney to hype their stocks from 1996 to 2001.

In return, Spitzer claims, Salomon got the firms' banking business - a relationship cemented by offering the executives lucrative stock in hot initial public offerings.

The Anschutz Corp. called the suit "unfounded and absolutely without merit." Qwest's board of directors, of which Anschutz was co-chairman, "was not responsible for the selection of investment banking firms during the periods in question," a spokesman said.

Charles Stillman, Nacchio's attorney, said Spitzer had filed the suit without giving Nacchio an opportunity "to set the record straight. Once all the facts are known, we are confident that Mr. Nacchio will be completely vindicated."

Also named in the suit are WorldCom's former CEO Bernard Ebbers, Metromedia Fiber Networks Chairman Stephen Garofalo and McLeod USA's CEO Clark McLeod.

Using a legal theory of "unjust enrichment," the suit asks the defendants to "disgorge over $28 million in profits . . . made by selling the IPO shares they were allotted by Salomon Smith Barney, and over $1.5 billion obtained through the sale of stock in defendant's respective companies, including through defendant's exercise of their stock options."

During the period that Salomon did business with Anschutz, the Denver tycoon "made the astounding profit of $1.45 billion," according to the suit. Nacchio, it says, made some $226 million by selling Qwest stock.

Nacchio's profits were from stock options, but Anschutz was selling shares he owned as the founding investor of Qwest.

Spitzer alleges that the firms 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.

"The CEO . . . was personally bought off by being given IPO allocations," Spitzer said at a Monday news conference. "Small shareholders were left holding the bag," he said.

The suit accuses the five executives of failing to disclose their companies' underwriting relationship with Salomon Smith Barney as required by state law.

"The executives received huge perks from a vendor who sought their business," Spitzer said. "Uninformed shareholders, meanwhile, lost millions of dollars when the stocks in the defendants' companies crashed."

At the center of the intrigue is former Salomon analyst Jack Grubman, according to the suit. Using e-mails and memos, Grubman is pictured as a cheerleader, puffing up stocks that he knew were heading into the tank.

In one memo, Grubman wrote: "Most of our banking clients are going to zero and you know I wanted to downgrade them months ago but got a huge pushback from banking."

In another memo, Grubman responded to a complaint he received from a Salomon client: "If I so much as hear one more . . . peep out of them, we will put the proper rating on this stock."

Despite this, Grubman maintained a "buy" rating on the company.

The suit claims that Grubman was an unobjective cheerleader for Qwest, WorldCom, Metromedia and McLeod - all Salomon customers.

To maintain hundreds of millions of dollars in investment banking fees raked in by Salomon, the investment firm also doled out to the executives stock in hot initial public offerings, according to the suit.

The Anschutz Corp. made $4.8 million from 57 IPOs, and Nacchio $1 million from 42, the lawsuit claims.

Ebbers made $11.5 million, Garofalo $1.5 million and McLeod $9.4 million by selling hot IPOs during the stock market's go-go days.

Lynn Turner, former chief accountant for the Securities and Exchange Commission and now director of Colorado State University's Center for Quality Financial Reporting, said Spitzer may be trying to get out in front of the SEC on the issue. And he may have the power to do it.

"Under New York state law, Spitzer has greater latitude to pursue cases than the SEC may be able to pursue," Turner said.

Spitzer is armed with the Martin Act, an 80-year old state law that gives him authority to prosecute fraud without having to prove intent. Authorities using the law don't have to prove perpetrators willfully did something illegal, which federal law requires. The statute is tougher than most state and federal securities laws because it calls for civil and criminal penalties, including jail terms.

The SEC can pursue only civil penalties.

The statement from the Anschutz Corp. said that investment professionals "with no involvement in Qwest's selection of investment bankers" made the IPO decisions. It added that Anschutz "never personally received any IPO allocations."

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