Executive Loses Case on Trading
By Gretchen Morgenson New
Saturday, February 11, 2006
Another telecom titan has tumbled.
In one of the last of the major conflict-of-interest cases
that rocked Wall Street nearly four years ago, a New York
State judge has found that the former chief executive of
McLeodUSA, a once highflying telecommunications company that
has filed for bankruptcy twice since 2002, is liable for
improper trading of hot new stock offerings during the
technology stock boom.
Eliot Spitzer, the New York attorney general, sued the
executive, Clark E. McLeod, and four other high-profile
telecommunications executives in 2002, contending that they
had steered investment banking business to Salomon Smith
Barney in exchange for inflated ratings on their companies'
stocks and hot new shares of other companies.
Mr. McLeod netted $9.96 million in profits on 34 stock
allocations from 1997 to 2000, the court filings said.
Salomon Smith Barney received more than $77 million in
underwriting fees from McLeodUSA.
In a decision issued Thursday, Justice Richard B. Lowe III
of New York State Supreme Court in Manhattan wrote that Mr.
McLeod's acceptance of initial public offering shares from
the same brokerage firm that his company used as an
investment banker, a practice known as spinning, was "a
sophisticated form of bribery."
He also found that because Mr. McLeod did not disclose his
hot-stock grants and the profits generated by them, he
misled both the investing public and his own company's
"We are gratified that New York courts have recognized that
undisclosed stock spinning is illegal and deceives the
public," Mr. Spitzer said in a statement. "This decision
sends a message that executives who put their own interests
ahead of their shareholders' will be held accountable."
Mr. McLeod, who lives in Cedar Rapids, Iowa, challenged Mr.
Spitzer's assertions that his receipt of undisclosed hot
stock offerings was illegal. His lawyer continued that
challenge yesterday, calling the case against Mr. McLeod
another example of overreaching by Mr. Spitzer.
"Clark McLeod is not Bernie Ebbers or anybody else of that
ilk," said Harold K. Gordon, a partner at Jones Day in New
York. "There is no evidence that there was any connection
between Mr. McLeod's receipt of these I.P.O. shares and
Salomon Smith Barney acting as the company's investment
Stating that Justice Lowe erred in his decision, Mr. Gordon
said Mr. McLeod would probably appeal.
The civil case against Mr. McLeod recalls the heady days of
1999 and 2000, when telecommunications companies like
WorldCom and Qwest were stock market darlings and the men
who ran them rock stars. A central figure in the case was
Jack B. Grubman, the powerful Salomon Smith Barney
telecommunications analyst who recommended McLeodUSA stock
repeatedly to the public, even as it plummeted.
Indeed, Mr. Spitzer contended that Mr. McLeod sold 2.2
million shares of his company's stock after Mr. Grubman
began recommending it, realizing a profit of almost $100
million from the sales. Mr. Grubman was barred from the
securities industry in 2002.
Mr. McLeod appears to have pursued the initial public
offering shares aggressively. For example, Mr. McLeod
testified that he personally asked for initial offering
allocations from chief executives of several companies
McLeodUSA did business with and that Salomon Smith Barney
was going to offer to the public.
The court must schedule a hearing to set the amount of
damages and restitution to be paid by Mr. McLeod.
The other executives sued by Mr. Spitzer for their initial
public offering profits were Philip F. Anschutz, former
chairman of Qwest Communications; Bernard J Ebbers, former
WorldCom chief executive; Joseph P. Nacchio, former chief
executive of Qwest who will be tried this year on insider
trading charges in Denver; and Stephen Garofalo, chief
executive of Metromedia Fiber Networks.
All four have settled with the attorney general. Mr.
Anschutz paid $4.4 million to settle; Mr. Nacchio paid
$400,000; and Mr. Garofalo paid $1.5 million. The
settlement with Mr. Ebbers, which has not yet been
completed, will be a part of his global resolution involving
the holders of stock and bonds who lost money when WorldCom
Andrew J. Lorin, an assistant New York attorney general and
enforcement section chief, argued the case before Justice
Lowe. "McLeod reached out to Salomon Smith Barney to get
these hot I.P.O. shares, which were like cash, while at the
same time McLeod's company was sending tens of millions of
dollars in banking business to S.S.B.," he said.
"It's simply wrong that an executive should receive these
types of payments from a company vendor and that none of it
was disclosed to the board or the shareholders."