Oct 1, 2002 4 min read

ALBANY, N.Y. (AP) – The New York attorney general sued five former and current top telecommunications executives Monday for allegedly taking millions in profits from initial public offerings of stock without disclosing potential conflicts of interest. Attorney General Eliot Spitzer alleges that Qwest Communications International Inc., WorldCom Inc., Metromedia Fiber Network Inc. and McLeodUSA Inc. steered underwriting business to Salomon Smith Barney in exchange for giving the executives access to lucrative IPO shares. Once the IPO share prices soared in trading, the stocks were often sold to result in millions of dollars of personal profits for the executives, Spitzer said.

“The CEO … was personally bought off by being given IPO allocations,” Spitzer said at a Monday news conference. “Small shareholders were left holding the bag,” he said.

Spitzer also said the deal presumed that Salomon Smith Barney would deliver favorable stock ratings for the executives’ companies as an inducement and reward for obtaining the investment banking business.

The suit accuses former WorldCom chief executive Bernard Ebbers, Qwest chairman Philip Anschutz, former Qwest CEO Joseph P. Nacchio, Metromedia Fiber chairman Stephen Garofalo and former McLeodUSA CEO Clark McLeod of failing to disclose their companies’ underwriting relationship with Salomon Smith Barney as required by state law.

Ebbers allegedly made more than $11 million from several dozen IPOs in the late 1990s. Anschutz allegedly made $5 million in profits in the deals, McLeod netted more than $9 million, and Nacchio took in more than $1 million, according to the suit.

Spitzer wants the money provided to investors, but was unsure how that would be done.

“The executives received huge perks from a vendor who sought their business,” Spitzer said. “This clearly was unjust enrichment, and it violated the disclosure requirements of state law. Uninformed shareholders, meanwhile, lost millions of dollars when the stocks in the defendants companies crashed.”

Representatives for Ebbers and Anschutz did not immediately return telephone calls seeking comment. Garofalo didn’t immediately respond to a request for comment.

Nacchio’s attorney, Charles Stillman, said his client would be vindicated.

“The claim that Joseph Nacchio steered business to Salomon Smith Barney in return for personal IPO allocations or favorable research reports is totally false,” he said. “There was no special relationship between Qwest and Salomon Smith Barney. In fact, the most important transaction in Mr. Nacchio’s business life, the acquisition by Qwest of US West, Salomon lined up against Qwest and represented Global Crossing.”

McLeodUSA spokesman Bryce Nimitz said the company had no statement to make regarding the lawsuit. Clark McLeod, who has a home in Cedar Rapids, Iowa, has an unpublished number and could not be reached.

The suit is part of Spitzer’s investigation of conflicts of interests at brokerages that sought investment banking business from companies while publishing inflated ratings of their stocks.

Last week, Salomon agreed to pay a $5 million fine to settle charges star analyst Jack Grubman issued misleading research reports about a telecommunications company that ended up filing for bankruptcy.

A spokeswoman for Citigroup, parent of Salomon, wouldn’t comment while the corporation is in “discussions” with Spitzer and federal regulators.

“We are moving aggressively to resolve questions about past practices and to institute far-reaching reforms,” Arda Nazerian said. “We are committed to being a leader in raising the standards of our industry.”

Columbia Law School Professor John Coffee, said Spitzer’s case would not be a slam dunk.

“I’m not saying he can’t win,” Coffee said, but “it’s going to be very hard to prove that, just by saying there was a lot of business that went to Salomon. Salomon had the leading analyst in the world (Grubman) and that’s an entirely credible reason for giving the business to them in order to get his loyalty.”

Grubman was not named as a defendant in Spitzer’s suit, but in a statement, his attorney said Grubman “had no responsibility for, nor did he influence, IPO allocations to telecommunications executives.”

In the late 1990s, investors big and small wanted a piece of the IPO action believing the IPO guaranteed big profits.

But while small, individual investors sought IPO shares, few got in early and profited. IPOs became a marketing tool for investment bankers, who underwrote the stock offerings for companies and had most of the control over how they were dispersed.

Many used the shares to woo clients and win more lucrative bank business.

Spitzer said other CEOs and analysts are being examined.

“Certainly there might be subsequent chapters,” he said.