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N.Y. Sues Telecom Brass For IPO Profits

Oct 1, 2002 | Toronto Globe & Mail Seizing the initiative from U.S. securities regulators, New York is suing WorldCom Inc. founder Bernard Ebbers and four other telecom executives to recover tens of millions of dollars in alleged ill-gotten gains from hot new share offerings.

The civil suit, filed yesterday by New York Attorney-General Eliot Spitzer, alleges that Citigroup Inc.'s Salomon Smith Barney Inc. brokerage "bought off" executives of WorldCom, Qwest Communications International Inc. and other companies with initial public offering shares to win lucrative investment banking business.

"The CEO was personally bought off by being given IPO allocations," Mr. Spitzer told reporters yesterday. "It was wrong. It shouldn't have happened."

Mr. Spitzer, who earlier this year secured a landmark $100-million (U.S.) settlement from Merrill Lynch because of conflicts of interest, said yesterday's lawsuit was part of a new campaign to make corporate executives pay back improper gains.

"We are no longer discussing and debating whether there is a problem," he said. "We are fixing it."

In addition to Mr. Ebbers, the lawsuit also names Qwest director Philip Anschutz, former Qwest chairman Joseph Nacchio, Metromedia Fiber Network Inc. chairman Stephen Garofalo and Clark McLeod, former chief executive officer of local phone provider McLeodUSA Inc.

Former Salomon telecommunications analyst Jack Grubman, who recently quit Salomon with a $32-million severance package, was the "centrepiece" behind the fraudulent payoff scheme, Mr. Spitzer said.

"This case exposes further conflicts of interest on Wall Street," he complained. "The spinning of hot IPO shares was not a harmless corporate perk. Instead, it was an integral part of a fraudulent scheme to win new investment banking business. The loser was the small shareholder."

Mr. Spitzer said Mr. Grubman's job was to write "phonyed-up" reports on current and prospective investment banking clients.

In return, the executives were granted privileged access to hot IPO offerings underwritten by Salomon, he alleged.

The defendants also profited as Mr. Grubman's overoptimistic reports sent shares of their own companies soaring, Mr. Spitzer said. The lawsuit alleges that the executives earned between $16-million and $1.4-billion by selling shares in their own companies.

The target companies then directed hundreds of millions of dollars worth of underwriting business to Salomon.

Mr. Grubman's lawyer yesterday called allegations that his client altered research to help executives and obtain investment banking business "categorically false."

Lee Richards said Mr. Grubman didn't have responsibility for or influence on initial public offering allocations to telecommunications executives.

The lawsuit alleges that Mr. Ebbers pocketed $11-million in profits from shares in numerous IPOs during a period in which WorldCom directed $107-million in business to Salomon.

At Qwest, Mr. Anschutz made $5-million in IPO profits, while Mr. Nacchio earned $1-million from dozens of IPOs. During the same period, Salomon picked up $37-million worth of underwriting business from Qwest, the lawsuit alleges.

Metromedia's Mr. Garofalo and McLeodUSA's Mr. McLeod similarly earned millions of dollars in IPO profits while at Salomon, according to the lawsuit.

The allegations have not been proven in court and the individuals have not yet filed a defence.

When the allegations first surfaced in August, Citigroup denied it did anything wrong and said the executives who received the shares were brokerage clients.

Mr. Ebbers' lawyer, Reid Weingarten, likewise has said there is no evidence the granting of IPO shares was tied to investment banking business. It was "perfectly legal," he said at the time.

Mr. Spitzer said neither Mr. Grubman nor Citigroup are named as defendants because his office is in settlement talks with them.

"They're not named, but their behaviour is central to what went on," he said.

Citigroup cited those settlement talks in refusing to comment on the lawsuit.

"Because we are in discussions with the New York Attorney-General and federal regulators in an attempt to resolve all research and IPO issues, we are not going to comment," Citigroup said in a statement.

Last week, Salomon agreed to pay a $5-million fine to settle allegations that Mr. Grubman misled investors with knowingly flawed stock advice. The U.S. National Association of Securities Dealers found that Salomon aggressively touted Winstar Communications Inc. shares even though it knew the broadband telecom provider was in financial trouble.

The NASD, an industry self-regulatory agency, the U.S. Congress and other regulators are continuing to investigate conflicts involving Salomon's research, including its dealings with Enron Corp., Global Crossing Ltd. and AT&T Corp.

Salomon's research department said the fine doesn't "address other, larger Salomon-related research analyst investigations currently under way by NASD and other regulators." Salomon is continuing to face regulatory and U.S. congressional scrutiny over its dealings with three other collapsed companies, WorldCom Inc., Enron Corp. and Global Crossing Ltd.

Mr. Spitzer has used the unusual provisions of the state's 80-year-old Martin Act as a stick to pursue corporate crime, allowing him to move more quickly and aggressively than either the U.S. Justice Department or the U.S. Securities and Exchange Commission. The SEC and the federal corporate crime task force have been faulted for so far failing to put anyone in jail during the recent wave of corruption scandals.

Unlike federal law, New York authorities need not prove intent on the part of perpetrators.

Under suspicion...

The New York State Attorney General has filed lawsuits against five executives of telecommunications companies, seeking disgorgement of profits made through alleged improper allocations of hot IPOs.

Philip Anschutz

Qwest Communications International Inc.'s founder and former chairman. Congressional investigators are probing some of his nearly $2-billion stock sales. Mr. Anschutz is well known for avoiding media interviews. His Anschutz Investment Co., an active Republican donor, holds interests in a wide range of industries, from oil exploration to Union Pacific Railroad.

Joseph Nacchio

Mr. Nacchio, known for his combative style, was ousted from the chief executive officer's post at Qwest last June. He had angered many by refusing to concede that the company was in trouble or that he was partly to blame. Gave deposition to Congressional investigators probing the company's accounting practices, particularly $750-million in equipment sales-for-services swaps.

Bernard Ebbers

Canadian-born former chief executive officer of Worldcom Corp. Resigned in April before fraud allegations became public. Currently under investigation for complicity in the false reporting of $7-billion (U.S.) in revenue.

Clark McLeod

Ex-chief executive officer, McLeod USA, a telecommunications company in Iowa that filed for Chapter 11 bankruptcy protection in February after spending billions of dollars building a local phone network serving 25 states.

Stephen Garofalo

Founder, chairman and former CEO of MetroMedia Fiber Network Inc. In 2000, Forbes magazines ranked Mr. Garofalo among the 400 richest U.S. citizens with an estimated wealth of $3.2-billion, but the tech crash had pushed him off the list by the next year.

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