Spitzer Looks To Recoup Profits From ExecutivesSep 30, 2002 | FT.com
Eliot Spitzer, the New York attorney general, on Monday sought to strip Bernie Ebbers and other US executives of millions of dollars in easy profits they reaped from Wall Street's initial public offerings machine at the height of the bull market.
Mr Spitzer filed a lawsuit against Mr Ebbers, the former WorldCom chief executive, and others, seeking to make them hand over the proceeds from hot IPOs they were awarded by the investment bank advising their companies.
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 attorney general's lawsuit - which marks the most direct effort by regulators to force individuals to hand back profits made during the bull market from what are now seen as inappropriate means - could trigger further litigation. It marks an aggressive shift in his effort to crack down on conflicts of interest in Wall Street during the technology and telecom stock bubble in the late 1990s.
Mr Spitzer had been focusing his investigation on instances where stock analysts at Merrill Lynch, Salomon Smith Barney and other firms touted companies to investors in order to win them as investment banking clients.
The lawsuit filed on Monday targets another conflict known as "spinning", in which Wall Street firms doled out shares of hot IPOs to top executives as an inducement to win their companies' investment banking assignments. The shares often rose several hundred per cent in the first days of trading, guaranteeing quick profits for their recipients.
The lawsuit names executives from five companies, including WorldCom, that were clients of Salomon, the investment banking unit of Citigroup.
Mr Ebbers earned more than $11m in profits from IPO shares granted to him by Salomon. In turn, WorldCom paid Salomon more than $80m in banking fees between 1998 and 2001 before it collapsed under scandal and filed the largest US bankruptcy.
Investigators from Mr Spitzer's office and the National Association of Securities Dealers have been probing whether Jack Grubman, Salomon's former telecom analyst, played a role in determining which executives received IPOs.
Salomon has denied any improprieties in the way it distributed IPOs. It has claimed that shares were granted to Mr Ebbers and other executives because they were valuable brokerage clients.
The lawsuit could complicate the firm's efforts to settle a series of inquiries into the conflicts of interest between its research analysts and investment bankers. Citi officials met with regulators last week to propose a separation of the two as part of a global settlement.
It could also lead to far-reaching legal action from Silicon Valley to Wall Street. Spinning was believed to have been pervasive in the late 1990s as securities firms competed aggressively to win technology and telecom companies as clients.