WorldCom’s Former CEO Got $11 Million in IPO Deals

NEW YORK â€”  Former WorldCom Inc. Chief Executive Bernard J. Ebbers got in on the initial stock offerings of hot technology companies during the late 1990s market bubble and earned $11 million in trading profits, thanks to his relationship with Wall Street brokerage Salomon Smith Barney.

Documents released Friday by the House Financial Services Committee showed that Ebbers turned a profit on 17 of 21 initial public stock offerings, with his largest gain topping $4.5 million on 100,000 shares of Metromedia Fiber Network Inc. Ebbers was one of several WorldCom executives who was allocated large blocks of shares in new public companies by Salomon.

“He made a lot of money and I’d like to know how many other people were as favored as he [was],� said Jim Cox, a professor of securities law at Duke University. “Why did he get the allocations?�

The documents were obtained by subpoenaing records from Salomon. The House committee is investigating whether the New York brokerage, which earned millions of dollars in investment-banking fees from WorldCom, tried to win business by parceling out coveted IPO shares to executives. Such spinning, as it’s known on Wall Street, may be in violation of securities laws.

The committee also is examining whether individual investors suffered as a result of preferential treatment for executives at WorldCom and other companies. Individuals who were denied shares in new public companies would have had to pay far higher prices for the stock once trading began. Buying at such inflated levels could have exacerbated losses for investors who held on to the stocks, many of which later plunged in value in the bear market.

“It’s hard evidence of the advantage that corporate insiders had over individual investors,� said Peggy Peterson, a spokeswoman for the committee’s chairman, Rep. Michael G. Oxley (R-Ohio).

Salomon, a unit of financial services giant Citigroup Inc., has denied any wrongdoing. In a letter accompanying the documents, Jane Sherburne, Citigroup’s deputy general counsel, said the executives received allocations of shares because they were among the firm’s best individual clients.

“We have found no evidence that shares in IPOs were allocated as a quid pro quo for investment-banking business,� Sherburne wrote.

A Salomon spokeswoman declined to comment.

The committee probe is part of a broad inquiry by congressional investigators and government regulators into Wall Street’s conduct during the late-1990s bull market. The investigations center on whether the firms committed abuses that hurt investors and helped to fuel the spate of corporate scandals.

In an IPO, a company sells shares to the public for the first time. Salomon allocated IPO shares to Ebbers, allowing him to purchase stock at the initial offering price, the documents show.

In the frenzied market of the late 1990s, stock offerings, especially for technology-related companies, routinely surged in value on their first trading day as investors clamored for hot IPOs. Thus, investors who were able to acquire shares at the initial price usually made large and immediate profits.

Documents released earlier this week showed that Ebbers was allocated 869,000 shares in 21 companies from 1996 through 2000. But the data, which had been gathered in an initial subpoena, fail to indicate when Ebbers and other executives bought and sold the shares, or how much they earned. At least seven of the companies in which Ebbers bought shares ultimately filed for bankruptcy protection, but Ebbers profited from his investment in six of those companies.

Ebbers’ biggest loss came on 35,000 shares of Williams Communications Group, a fiber-optic network operator that went public in September 1999 at $23 a share. Ebbers still holds the shares, giving him a paper loss of $804,405.

Salomon said the shares Ebbers bought in one of the companies, a $440,125 gain in Juniper Networks Inc., were distributed to him by Juniper rather than by Salomon, thus making his gain on Salomon allocations about $10.6 million.

The data made public Friday also show that Stiles Kellett, a WorldCom board member, earned a profit of $202,047 on 29 IPO issues he received.

However, Scott D. Sullivan, WorldCom’s former chief financial officer who this week was indicted on criminal charges for allegedly inflating the company’s earnings, lost a total of $13,059, the records show. Sullivan booked gains on seven of nine new offerings, but incurred a $144,450 loss on Internet company Rhythms NetConnections Inc.

Ebbers continued to receive allocations of shares in new public companies despite selling several IPOs shortly after buying them. In 12 offerings, he sold all or part of his holdings within a month, including stocks in three companies that he unloaded the same day.

Small investors who engage in such “flipping� often are denied subsequent allocations. Brokerages have said they want investors who will hold the stocks for the long term, providing a company with a stable shareholder base.

As they study the documents, investigators are expected to look closely at the specific dates on which shares in new public companies were placed in Ebbers’ Salomon brokerage account.

The timing is key because investigators are trying to determine whether Ebbers received shares after trading had begun and the shares already had risen in value. Awarding shares after the price had gone up would have given him a risk-free profit.

In 10 instances, the date on which shares were credited to Ebbers’ account was a day after the trade date, when the shares were priced, the records show. The gap is two days on two occasions, and three days on one occasion.

Salomon said in its letter that booking shares in new public companies a day or two after the trade date is “appropriate and common� and can occur for a “host of benign reasons.�

That can happen when allocations are confirmed after the stock market has closed for the day or when final allocation data is not available immediately, Sherburne wrote.

Sherburne also addressed an issue that arose in documents supplied for the first subpoena. Salomon revealed that its brokers sought tens of thousands of shares in two hot new public companies for about two dozen other telecom executives in 1999.

Sherburne said in Friday’s letter that the brokers received only about 2% of the requested shares.

WorldCom paid Ebbers $1 million in salary in 2001, but he was not awarded a bonus for the year. He was granted options to buy 1.2 million WorldCom shares, and received nearly $48,000 in 401(k) contributions and personal use of the corporate jet.

His most controversial compensation came in the form of company loans totaling more than $400 million, which will be repaid over five years under an amended agreement reached after Ebbers’ resignation in April.

As part of Ebbers’ severance agreement, WorldCom agreed to pay him an annual pension of $1.5 million for life, and $750,000 per year to his wife for life, plus medical and life insurance benefits, use of corporate aircraft and office space.

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Hamilton reported from New York and Douglass from Los Angeles.