Timing Is Key in IPO Awards to WorldCom

The timing of coveted new stock allocations from Salomon Smith Barney to executives of WorldCom Inc. is shaping up as a potentially key question in a congressional probe into whether the brokerage doled out shares to win investment banking business.

At issue is whether Salomon placed shares of late-1990s initial public offerings in the accounts of WorldCom executives after the shares had begun to trade. Because many IPOs soared on their first trading day, awarding shares at the IPO price in the days after an offering could have guaranteed the buyer a risk-free profit.

The House Financial Services Committee is studying Salomon’s dealings with WorldCom as part of a probe of the telecom firm’s record bankruptcy in July. The committee is investigating whether Salomon dispensed shares of hot IPOs to WorldCom executives as a way to lure lucrative investment banking business--and if it did, whether that broke any laws.

Salomon and its parent, Citigroup Inc., deny wrongdoing.

In response to a committee subpoena, Salomon released documents showing that the firm allocated almost 900,000 shares of various IPOs to Bernard J. Ebbers, WorldCom’s former chief executive. Several other WorldCom executives also were awarded IPOs.

In its subpoena, the committee asked for the dates when Ebbers and other executives acquired shares, but did not receive that information, said Peggy Peterson, a spokeswoman for the committee, which is chaired by Rep. Michael Oxley (R-Ohio).

Arda Nazerian, a Salomon spokeswoman, said the firm believes “we supplied all the information requested in the subpoena.”

The committee is believed to be considering another subpoena.

The practice of doling out IPO shares to select executives, which is known on Wall Street as “spinning,” has long been controversial.

Securities law experts say spinning itself is not illegal. An explicit quid pro quo in which an executive promised business to an investment bank in exchange for IPO shares could violate securities laws, but proving such a link is difficult, experts said.

“You can’t say you found a smoking gun because you found spinning,” said John Coffee, a securities law professor at Columbia University. “What you need to show is, in effect, allocations of free money to highly placed executives in hopes those executives would reciprocate by giving business” to a brokerage.

If IPOs were given to clients only after trading had begun and the shares had risen, the clients would have taken no risks yet been guaranteed immediate profit.

In such a scenario, a brokerage could give the appearance of allocating the IPO shares to other investors, then reallocate them to favored executives only after they had shown a profit, experts said.

Salomon “can wait and see how hot the offering is,” said Stephen Bainbridge, a UCLA law professor. “If it’s really hot and it would lock in a huge profit, then they can reallocate the shares and give their investment banking client a sure thing. If the offering is not hot, the investment banking client has not invested in a so-so stock.”

Salomon has said it based its IPO distributions to WorldCom executives on the size of their personal brokerage accounts. The WorldCom executives were among the firm’s “best customers,” Salomon said, noting that it is industry practice to give IPO shares to high-net-worth investors whose trading generates large fees for the firm.

In the documents it sent the House, Salomon said the date an investor acquires IPO shares can sometimes be after the public offering.

One reason such “as of” trading can occur is that some customers renege, meaning they “may not be willing or able to pay” for the shares, Salomon said. The firm then would allocate the shares to another customer at the IPO price.

But it is unlikely that large numbers of investors would have reneged on IPOs in the late 1990s, given the enormous profits that many of the deals instantly generated, experts said.