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Executive Loses Case on Trading
By Gretchen Morgenson New York Times
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 board.

"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 banker."

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 collapsed.

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."

http://www.nytimes.com/2006/02/11/business/11wall.html?adxnnl=1&adxnnlx=1139656080-Lq2cQzuBSpRaCXI73jRevA