Documents released by a congressional panel Tuesday revealed that Citigroup’s investment arm showered ex-WorldCom CEO Bernie Ebbers with 869,000 shares of plumb initial public offerings during a white hot stock market when virtually every IPO doubled or tripled on the first day of trading. In one IPO grant, Ebbers alone received over 66 percent of all the shares Citigroup’s Salomon Smith Barney predecessor, Salomon Brothers, was allowed to allocate.
THE DOCUMENTS WERE released Tuesday by the House Financial Services Committee after they turned over by Citigroup under subpoena.
The documents show that Salomon Smith Barney allocated four WorldCom executives and directors an average of 6,400 shares starting in late 1997. The predecessor company, Salmon Brothers, had allocated an average of 101,500 shares, according to the House documents.
“The IPO allocations to WorldCom officers and directors at issue here were reasonable since these were high net worth individuals and substantial retail clients,” Citigroup lawyer Jane Sherburne said in the letter to the Committee. “Existing rules and industry practice give firms a broad range of discretion in granting IPO allocations and we believe we acted well within that broad range,” Sherburne said. She added that Salomon was considering new measures to improve the allocation process.
Sherburne, however, also acknowledged that “some allocations to corporate officers and directors… while lawful, were sufficiently large to raise questions about the appearance of conflicts.”
The Committee’s investigation centers on whether former Salomon star telecom analyst, Jack Grubman, compromised his integrity by maintaining favorable “buy” ratings on the company in order to curry favor with WorldCom executives in return for tens of millions of dollars in investment banking business. Grubman resigned recently amid a cloud of controversy over maintaining those “buy” recommendations for WorldCom even as the company was sinking into bankruptcy.
During a recent congressional hearing Grubman strongly denied any personal knowledge of the company providing WorldCom executives with favored IPO shares, that it wasn’t his job to make those decisions but added, “I can’t categorically say it didn’t happen.”
In two of the documents released Tuesday that detail the IPO interest that certain wealthy Salomon customers had in the offerings of Juno and Rhythms Net Communications, Ebbers heads both lists wanting 300,000 shares of each. He was eventually given just 10,000 shares of each. However, Grubman was listed as getting copies of each of those request lists.
“We have located very few documents that even connect Jack Grubman to IPO allocations to these investors,” Sherburne said, adding that research analysts and investment bankers are not responsible for allocation decisions.
IPO allocations since Nov. 28, 1997, ranged from 50 shares to 35,000 shares and an average investment per allocation was $138,546 with an average return of $83,242, according to Citigroup.
Prior to the combination that created Salomon Smith Barney in late 1997, Salomon Brothers allocated on 12 occasions between 1,000 and 250,000 shares that carried an average investment of $2.05 million. The associated average return was $2.31 million, according to Citigroup.
EBBERS CLEANS UP
Ebbers was clearly the biggest beneficiary of the Salomon IPO generosity. According to the documents, he received 869,000 shares at a cost of some $17 million for in 21 offerings.
In one offering, for McLeod, Inc. a telecommunications firm that serves small and mid-size companies in 25 states, Salomon gave Ebbers 200,000 IPO shares or 66.67 of its total allotment. Ebbers also received 205,000 shares (12.42 percent of Salomon’s total allocation) of a Qwest IPO; 200,000 shares (10.52 percent) of Nextlink.
The records don’t provide details as to when Ebbers might have sold the stock or how much money he made or lost on the IPO transactions.
By comparison, ex-WorldCom CFO Scott Sullivan, who was arrested in connection with an investigation into the company’s accounting practices, received a total of 32,300 IPO shares, according to the documents. Sullivan’s biggest allocation: 7,000 shares, less than one percent of Salomon’s total allocation, for Rhythms Net Connections.
Stiles Kellett, a WorldCom director, received 31,500 IPO shares from Salomon. Kellett hit the headlines earlier this year when a story in the Washington Post detailed how he was renting WorldCom’s corporate jet for $1 per year. The jet was rarely used by WorldCom officials, according to the Post story and Kellett paid for the plane’s upkeep, operating expenses and crew. Kellett leased the plane for just a year and the deal wasn’t renewed, the Post said.
Securities experts say the practice of favoring rich clients with IPO grants is, indeed, a common practice, though some acknowledged that the amounts granted Ebbers were high.
But such practices are cold comfort to investors who feel bilked by the whole matter. “To the average investor the juxtaposition of these officers of WorldCom lining their pockets while taking WorldCom into bankruptcy is just too much to bear,” said Peggy Peterson, a spokeswoman for the House Financial Services Committee. She added that looking at the documents it’s “difficult to escape the conclusion” that the shares were traded for investment banking services.
But it’s not clear that any actual wrong doing took place, Peterson said.
“These allocations may or may not have been technically illegal, I don’t know the answer to that,” Peterson said. “However they raise questions in the minds of our Committee members and in the minds of every investor about how and why this was done.”