Ex-WorldCom chief among telecom execs sued for shady IPO deals
By Walter Hamilton
Los Angeles Times
NEW YORK — Five telecom industry executives, including former WorldCom Inc. Chief Executive Bernard J. Ebbers, were sued yesterday by New York state on charges that they steered business to a big Wall Street brokerage in exchange for hot stock offerings.
The civil suit by New York Attorney General Eliot Spitzer alleges that the men directed corporate finance work for their firms to Salomon Smith Barney, the brokerage arm of Citigroup Inc., in return for sweetheart deals on initial public stock offerings in recent years.
Wall Street's practice of personally rewarding executives with coveted IPOs is known as "spinning" and is the subject of several probes by state and federal regulators. Spitzer is the first regulator to formally bring charges.
The complaint seeks the disgorgement of $28 million in spinning profits made when the executives sold their IPO shares.
The suit also seeks disgorgement of an additional $1.5 billion the executives reaped by selling shares of their own companies. Spitzer alleges that those gains were ill-gotten because Salomon analysts touted the companies' shares to the public as part of the scheme.
The other executives named are Philip F. Anschutz, Los Angeles sports mogul; Joseph Nacchio, former chief executive of Qwest Communications International Inc.; Stephen Garofalo, chairman of Metromedia Fiber Networks Inc.; and Clark McLeod, former CEO of McLeod USA Inc.
The men were charged with fraud, failure to disclose financial dealings and personal enrichment at the expense of their companies.
"The CEO was personally bought off by being given IPO allocations," Spitzer said at a news conference. "It was wrong. It shouldn't have happened."
The suit seeks the disgorgement of the money to the executives' companies.
Spinning has been widespread on Wall Street for years but has come under intense scrutiny in the past year amid the host of financial scandals that have rocked Wall Street and corporate America.
Documents released by congressional investigators in August revealed that Ebbers earned $11 million in profits on 21 IPO shares allocated to him by Salomon between 1996 and 2000.
Anschutz, who built his fortune in the fiber-optics business and also owns the Los Angeles Kings hockey team and one-third of the Los Angeles Lakers basketball franchise, received shares in 57 IPOs, earning $5 million, Spitzer's complaint said.
Nacchio earned more than $1 million from 42 IPOs, the suit says. Garofalo took part in 37 IPOs, earning $1.5 million. McLeod made $9 million on 32 deals.
Reid H. Weingarten, an attorney for Ebbers, said his client had no quid pro quo with Salomon. "These were not perks. He was willing to take the risk, but there were no guarantees," Weingarten said. "He also didn't feel he had to give any business to (Salomon)."
Charles Stillman, an attorney for Nacchio, said in a statement that the allegations were "totally false" and that Nacchio will be "completely vindicated."
A spokesman for the Anschutz Corp. said the IPO shares went to Anschutz's more than 100 companies and that Anschutz himself did not personally receive any IPO shares. The firm said the suit is "absolutely without merit."
Garofalo's attorney declined to comment. McLeod couldn't be reached.
Salomon earned $240 million in investment-banking fees from the executives' companies in the late 1990s, the suit said.
Spitzer's suit grew out of his office's broad investigation of Salomon and its stock analysts. Along with other regulators, Spitzer is probing whether analysts at Salomon and other big Wall Street firms hyped stocks to please executives of the subject companies, in the hope of winning banking work.
