Former WorldCom Inc. Chief Executive Bernard J. Ebbers received thousands of shares of valuable initial public offerings of stock from Salomon Smith Barney, the financial-services unit of Citigroup Inc. (NYSE: C – News) known as a WorldCom booster.
The lucrative opportunity to buy thousands of shares of stock in an IPO before prices rose was also extended to the company’s former chief financial officer, Scott Sullivan. He has been indicted on charges of fraud and conspiracy for his role masking losses at WorldCom and deceiving investors.
The disclosures were made by the House Financial Services Committee, which held hearings on the WorldCom accounting scandal last month, where Salomon’s star telecom analyst, Jack Grubman, testified. He told the panel he didn’t know whether WorldCom executives were given special access to IPOs, “but I can’t categorically say it didn’t happen.”
The committee subpoenaed documents from Salomon to determine what kind of treatment the firm gave one of its biggest clients, WorldCom, a firm which also benefited from Mr. Grubman’s bullish pronouncements.
Also receiving shares were WorldCom director Stiles A. Kellett, Jr. and Chairman Bert Roberts. WorldCom spokesman Brad Burns said Mr. Roberts disclosed his IPO shares to the committee several weeks ago and “indicated he lost $58,000 in the transaction.” He was allocated 3,000 shares in AT&T Wireless Group. (AWE) .
Mr. Ebbers was allocated 869,000 shares in initial public offerings by Salomon, while Mr. Kellett was allocated roughly 31,500 shares. Mr. Kellett, who is chairman of Kellett Investment Corp. of Atlanta, couldn’t be reached for immediate comment.
Mr. Sullivan and his wife, Carla, were allocated 32,300 shares.
In a letter to the committee released by Citigroup Monday, Citigroup’s deputy general counsel Jane Sherburne said that while the allocations were made “in accordance with applicable regulatory standards and industry practice, we also understand that regulatory standards are evolving. We accept and embrace that change and are determined to take a leadership role in maintaining public confidence in the markets.”
According to Citigroup, Salomon — like most firms — has “traditionally allocated IPO shares to provide the most effective distribution of the issuer’s shares while giving preference – where consistent with effective distribution – to the firm’s best customers.” Factors taken into account include the level of personal business the customer could generate in the future.
WorldCom’s officers and directors “were high net-worth individuals and substantial retail clients” in the top 1% of Salomon’s traditional clients, Salomon said. Existing rules and industry practice “give firms a broad range of discretion” in granting IPO allocations.
When Salomon underwrote 5.3 million of the 34 million shares in an October 1999 IPO for Williams Communications Group (WCGRQ), it earmarked 35,000 shares for sale to Mr. Ebbers. In general he stood to gain by the proposition in the up market.
The practice of individual IPO allocations wasn’t addressed by the new securities-reform law passed by Congress last month. But Financial Services Committee spokeswoman Peggy Peterson said the panel “may take a look at this” for future legislation.
The problem, she said, is that the practice “is fraught with conflict all around.” At the same time Mr. Grubman was hyping the IPO to the investing public, the company was allowing Mr. Ebbers to profit from the hype while competing for his investment-banking business.
She added that the “juxtaposition of these folks who were so adept at lining their own pockets at the same time they were taking the company into bankruptcy is too much to take.”
There is no evidence the WorldCom executives got a discount on their shares. But the committee is looking at whether they “spun” their shares at higher afternoon prices by exercising options to buy the stock pegged to the opening bell.