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N.Y. Suit Says Nacchio, Others Wrongly Profited From IPOs

Oct 1, 2002 | The Denver Post

New York's attorney general filed a lawsuit Monday alleging that top executives at four companies, including Qwest, accepted stock in newly public companies in exchange for directing business to Salomon Smith Barney.

Eliot Spitzer, who has investigated conflicts of interest at Merrill Lynch and Salomon for months, named in his lawsuit former Qwest chief executive Joe Nacchio, Qwest founder and director Phil Anschutz, former WorldCom CEO Bernard Ebbers and two others.

Spitzer alleges that Salomon doled out shares of companies about to debut on the public markets known as initial public offerings, or IPOs to top officials of big telecommunications companies. In exchange for the shares, those executives were expected to steer their companies' investment-banking business to Salomon, Spitzer's lawsuit charges.

Representatives of both Nacchio and Anschutz denied the charges, adding that Spitzer's office did not contact them prior to filing the lawsuit. "Once all the facts are known, we are confident that Mr. Nacchio will be completely vindicated," Nacchio's attorney, Charles Stillman, said in a statement released Monday.

According to Spitzer, the five executives named in the lawsuit gained cumulative profit of $28.2 million from selling the shares Salomon provided them. Salomon reaped $240 million in investment-banking business from the executives' companies, the lawsuit claims.

Spitzer cited a New York law in arguing the companies had a duty to inform their shareholders of the potential conflict of interest.

The lawsuit reads, "Purchasers of the securities of the defendants' companies were never informed that the companies' officers received millions of dollars in profit through hot IPO allocations from Salomon, the very firm a vendor that was performing investment banking services for the defendants' companies, and whose star research analyst was covering the defendants' companies, with 'buy' recommendations while aware of the distribution of the hot IPO shares."

According to Spitzer's data, WorldCom's Ebbers netted $11.5 million in profit from selling IPO shares provided by Salomon; Anschutz, $4.8 million; Nacchio, $1 million; Metromedia Fiber Networks chairman Stephen Garofalo, $1.5 million; and former McLeodUSA CEO Clark McLeod, $9.4 million. Salomon gained $107 million in investment-banking business from WorldCom, $37 million from Denver-based Qwest, $47 million from MFS and $49 million from McLeodUSA, the lawsuit charges.

A statement released by the Anschutz Corp. on Monday called the lawsuit unfounded and without merit.

"The board of directors at Qwest, which includes Mr. Anschutz, was not responsible for the selection of investment banking firms during the periods in question," the statement reads.

"The Anschutz Corp. is an investment firm that owns or controls over 100 companies. A number of professional investment advisers work for the corporation and manage its large portfolio of publicly traded stocks and bonds. Any decision relating to IPOs by the corporation was made by investment professionals with no involvement in Qwest's selection of investment bankers."

The statement added that Anschutz himself received no IPO shares. Anschutz sits on the boards of four companies other than Qwest.

Stillman, Nacchio's attorney, called the lawsuit's claims "totally false." He pointed out that Salomon advised Global Crossing in its competition with Qwest to snare US West as a merger partner.

"There was no special relationship between Qwest and Salomon Smith Barney," Stillman wrote.

Dale Oesterle, a law professor at the University of Colorado at Boulder, called Spitzer's case difficult to prosecute.

"The argument that the executive breached a duty of candor, a failure to disclose is problematic," Oesterle said. "It either bootstraps on the basic fiduciary breach - the executives should tell shareholders when they are in violation of their duties. Or, it is not very convincing, (as in) why should firm shareholders know about executives' personal business investments in non-firm stock?"

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