WorldCom Inc. insiders made substantial gains on initial public offerings underwritten by Citigroup’s Salomon Smith Barney unit, with former Chief Executive Bernard Ebbers alone raking in $11 million, according to information released Friday.
Citigroup supplied the additional information, showing how it allocated hot IPOs to top-drawer clients, in response to a second subpoena from congressional lawmakers.
House Financial Services Committee Chairman Michael Oxley (R., Ohio) said the lucrative gains made by Mr. Ebbers and other WorldCom executives raises questions about fairness on Wall Street.
“The market should reward investors for taking calculated risk,” Rep. Oxley said in a statement. “This is an example of how insiders were able to game the system at the expense of the average investor.”
In a letter responding to the subpoena, Citigroup acknowledged Mr. Ebbers and other WorldCom executives weren’t average investors, but were “among Salomon Smith Barney’s best individual customers,” with accounts that put them in the top 1% of the firm’s retail clients.
Citigroup said it found no evidence that shares in IPOs were doled out in exchange for investment-banking business, however, and defended its practices as “well within the range of discretion that regulators have traditionally accorded” to Wall Street firms.
Documents provided to the House panel show WorldCom executives got access to IPOs at the original offering price and netted big gains on later sales.
Mr. Ebbers made $4.5 million on bankrupt Metromedia Fiber Networks Inc., which went public in 1997, obtaining the stock at the initial offering price of $16 a share and selling it in 1998 for between $24 and $71 a share, the documents show.
Qwest Communications International Inc. (NYSE: Q -News) and Nextlink Communications Inc., which also went public in 1997, were lucrative for Mr. Ebbers as well, earning him $1.95 million and $1.8 million respectively, the documents show. Nextlink changed its name in 2000 to XO Communications Inc. (XOXOQ) .
Citigroup pointed to a “dramatic difference” in IPO allocations after Salomon Brothers was acquired in November 1997 and merged into Smith Barney.
Before the merger, WorldCom officers and directors obtained an average cumulative gain on IPOs of $4.2 million, a level that fell to $41,000 after the merger, Citigroup said.
As for Mr. Ebbers, Citigroup said he realized gains of $10.6 million from IPOs underwritten by Salomon, and just $63,000 for those from Salomon Smith Barney. Two of his most lucrative post-merger deals were shares in Juniper Networks Inc. (NasdaqNM: JNPR – News) producing a $440,000 gain and Chartered Semiconductor Manufacturing Ltd. (CHRT) providing a $291,000 gain. Both went public in 1999. Mr. Ebbers acquired 5,000 shares in Juniper Networks at $34 a share and sold 3,600 the first day for a $237,000 gain.
Not all of the IPOs were money-makers, however. Mr. Ebbers lost money on a few and had unrealized losses on others.
Scott Sullivan, the former WorldCom chief financial officer, indicated earlier this week for securities fraud, was another beneficiary of IPO allocations from Salomon Smith Barney. Documents show he obtained 10,000 shares of Williams Communications Group (WCGRQ) at the $23 offering price in October 1999 and sold them within 10 days for more than $30 a share.
Citigroup said the fact that some IPOs were booked a day or two after the original offering date at the original offering price is common on Wall Street, reflecting “benign” factors such as pricing an IPO or obtaining allocations after the close of business. Moreover, in a hot IPO, rules bar underwriters from keeping shares for its own benefit, so if customers renege, the shares must be offered to another customer at the original offering price even if the stock is already trading well above that level, Citigroup said.