A former telecommunications CEO has agreed to pay $4.4 million to settle an investigation into insiders who made windfalls in initial public stock offerings, according to the New York state attorney general's office.
Clark McLeod, who had been chairman and chief executive of McLeodUSA, agreed to turn over profit he was accused of receiving from the so-called act of spinning, Atty. Gen. Eliot Spitzer said. The deal was to be formally announced today.
The former executive was accused of directing $77 million of McLeodUSA's investment banking business to what was then Salomon Smith Barney.
In exchange, the company "secretly" gave McLeod shares of 34 companies before their initial public offerings, which resulted in a windfall of $4.8 million on the first days of trading, according to Spitzer's 2002 civil lawsuit.
There was no finding or admission of liability in the settlement, which dismisses Spitzer's action against McLeod.
McLeodUSA Inc., a telecommunications company based in Cedar Rapids, Iowa, emerged from Chapter 11 bankruptcy protection in January after eliminating $600 million in debt.
The settlement on Friday closes one of Spitzer's early Wall Street investigations. Some critics of the probe had initially said the practice of "spinning," in which executives receive stock in a company before it goes public and the shares leap in value, couldn't be proved to be illegal.
While handling the case in February, state Supreme Court Justice Richard B. Lowe called spinning a "sophisticated form of bribery."
Lowe issued summary judgment against McLeod and scheduled a hearing to determine how much he would pay in damages and restitution. The settlement avoids the hearing.
The $4.4 million will be given to New York law schools to fund arbitration clinics involving securities disputes affecting smaller investors, said Spitzer, who after two terms as attorney general is the leading Democratic Party candidate for governor.
Previous Spitzer settlements in the IPO spinning investigation resulted in $6.3 million in payments from Bernard J. Ebbers of WorldCom, Philip Anschutz and Joseph Nacchio of Qwest Communications, and Stephen Garofalo of Metromedia Fiber Networks.
John C. Coffee, a securities law expert at Columbia Law School, said the Securities and Exchange Commission hasn't banned quid pro quos such as spinning, although a measure was proposed two years ago. However, it was banned at a dozen top Wall Street firms under Spitzer's 2003 "global settlement" of conflicts of interest by stock analysts.