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Spitzer In Talks With Salomon Amid IPO Probe

Oct 1, 2002 | FT.com Eliot Spitzer confirmed his office was in negotiations with Salomon Smith Barney, as the New York attorney-general stepped-up his campaign into conflicts of interest at the investment bank.

Speaking on NBC's "Today" programme, Mr Spitzer said there had been dialogue with Citigroup owned Salomon but said that he would not be drawn on possible outcomes.

The revelation came the day after Mr Spitzer filed a landmark lawsuit which could result in top telecommunications executives, including Bernie Ebbers of WorldCom, being forced to hand back more than $1.5bn of profits they reaped from Wall Street's initial public offerings' machine.

Mr Spitzer said that other executives were also under investigation and predicted his action would trigger a series of civil suits by investors to force executives to return profits made from sales of stocks hyped by Wall Street.

The lawsuit marks a dramatic escalation of Mr Spitzer's campaign against conflicts of interest at Salomon. The suit reveals graphic email evidence in which its former telecom analyst Jack Grubman refers to companies that the firm was recommending to investors as "pigs".

"Jack Grubman is not an analyst, he is an investment banker. He sold us a bill of goods on WorldCom and AT&T, and now we're bleeding red in our clients' accounts. How about sharing some of the $25m salary with our clients who bought into his glorified stories? Whose team is Grubman on?"

"Grubman is an absolute disgrace to our firm as an 'analyst.' Maybe as a 'banker' he makes the firm a lot of money, but on the retail side the damage he has caused is a disgrace! I hope many clients sue!"

"Grubman is an investment bank whore! When is the firm going to stop pimping him?"

"In my 16 years in the retail brokerage business, never have I received such misguided, horrific recommendations from an analyst." Comments Salomon Smith Barney retail brokers made in 2000 and 2001 regarding Jack Grubman

In addition to Mr Ebbers, the former WorldCom chief executive, the suit names executives from three other Salomon clients. It seeks to recover more than $28m in profits from hot IPOs the executives received from Salomon. Mr Spitzer is also seeking the return of $1.5bn that the executives made from selling shares in their own companies - $1.4bn of which was from Philip Anschutz, the former chairman of Qwest Communications.

The attorney-general has argued that granting IPO shares to executives in the hope of winning their companies' investment banking work was a form of "commercial bribery".

"The CEO was personally bought off by being given IPO allocations. It was wrong. It shouldn't have happened," Mr Spitzer said on Monday.

The lawsuit targets the practice of "spinning", where Wall Street firms doled out shares of hot IPOs to executives as an inducement to win their comp anies' investment banking assignments. The shares often rose several hundred per cent in the first days of trading, guaranteeing quick profits for their recipients.

Mr Ebbers earned more than $11m in profits from IPO shares granted to him by Salomon in the mid-1990s. In turn, WorldCom paid Salomon more than $107m in banking fees during the same period before it collapsed under scandal and filed the largest US bankruptcy.

The suit, which makes use of New York State's broad securities laws, also names Joseph Nacchio, Qwest's former chief executive, Clark McLeod, former chairman of McLeodUSA, and Stephen Garofalo, chairman and chief executive of MetroMedia Fiber Network.

A lawyer for Mr Nacchio denied there was a special relationship between Salomon and Qwest. A spokesman for the Anschutz Corporation said Mr Anschutz "never personally received any IPO allocations".

Salomon has denied any improprieties in the way it distributed IPOs.

Mr Grubman's lawyer said that his client had no responsibility for IPO allocations and denied that his research was biased.

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