Salomon Brothers and its successor firm, Salomon Smith Barney Inc., awarded nearly 1 million shares in initial public stock offerings to then-WorldCom Inc. chairman Bernard J. Ebbers before the shares were made available to the general public, according to documents released by Congress today.
The firm also awarded potentially lucrative IPO shares to Scott D. Sullivan, who was the chief financial officer, and several others affiliated with WorldCom, including Stiles A. Kellett Jr., a member of the firm’s board of directors. Ebbers and Sullivan are no longer with WorldCom, but Kellett is still on the board.
WorldCom, now fighting for survival in federal bankruptcy court, was a lucrative investment-banking client of Salomon Brothers, and later Salomon Smith Barney, during the telecommunications boom of the late 1990s.
In addition to the allotments, the documents released today show that Jack Grubman, then a Salomon telecom analyst and now the subject of multiple investigations into the rosy research reports he wrote on WorldCom and other firms, was at least aware that the shares were being awarded to Ebbers. The documents indicate that Grubman was to receive copies of two memos listing the IPO shares to be awarded to a handful of Salomon clients, including Ebbers.
Salomon officials said Monday, after releasing portions of the documents, that the IPO allocations were legal and had adhered to industry rules. But officials of the firm also said the size of some of the allocations may create the appearance that a conflict of interest existed. They said the firm was considering new IPO policies.
A Salomon official said today that none of the documents prove that Grubman had any direct role in the allocations. The official said the list of allotments was circulated to the analyst for informational purposes only.
WorldCom paid hundreds of millions of dollars in underwriting and advisory fees to Salomon in the late 1990s. Those fees contributed to Grubman’s compensation package, which reached as high as $20 million per year during the boom.
Grubman kept positive ratings on WorldCom until just before the firm filed for bankruptcy protection earlier this year after acknowledging massive accounting errors. Grubman also kept “buy” ratings on a number of other telecommunications firms that have since filed for bankruptcy protection.
Congressional, federal, state and industry investigators are trying to determine whether Salomon, now a unit of Citigroup Inc., improperly awarded IPO shares in return for investment banking business. They also want to know whether Grubman issued fraudulently bullish reports on telecom firms in return for that business.
Peggy Peterson, a spokesman for the House Financial Services Committee, which subpoenaed the documents, said today that the allotments show that Ebbers and others at WorldCom were “adept at lining their own pockets while their company was headed into bankruptcy.”
She also said the filing “raises questions” about whether Salomon engaged in IPO “spinning” — allotting IPO shares to the private brokerage accounts of top executives in return for banking business from the executives’ firms. The executives then quickly sell, or spin, the shares after they rise on the open market, booking quick — and during the 1990s stock boom often very large — gains. If Salomon did engage in spinning, the firm could have been in violation of industry rules.
But the documents submitted by Salomon this week do not indicate when, or if, the WorldCom officials sold their IPO shares. Salomon said Monday that between January 1996 and November 1997, when most of the allotments took place, the WorldCom executives made an average profit of $2.3 millionon the shares. Ebbers, who received by far the greatest number of shares, in firms including KPNQwest NV, Juniper Networks Inc. and Rhythms NetConnections Inc., could have made significantly more.
An attorney for Ebbers did not return a call for comment.
In addition to Ebbers, Sullivan received several thousand potentially valuable IPO shares. An attorney for Sullivan did not return a call. Kellett, the current board member, received allotments ranging from 50 to 8,000 shares in nearly 30 initial public offerings. Kellett could not be reached for comment, and a WorldCom spokesman said he was not authorized to speak for the director.
The documents also show that the current WorldCom chairman, Bert C. Roberts Jr., received 3,000 shares from Salomon when AT&T Corp. spun off its wireless division. A WorldCom spokesman said Roberts had already disclosed the allotment, lost money on the shares and did not receive them from Grubman.