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New York state Attorney General Eliot Spitzer is suing former WorldCom Inc. Chief Executive Bernard Ebbers and four other executives of telecommunications firms for allegedly taking millions in profits from initial public offerings in exchange for steering banking business to Citigroup subsidiary Salomon Smith Barney Inc. In addition to Ebbers, Spitzer has alleged that Qwest Communications International Inc. board member Philip Anschutz and former Qwest Chairman Joseph Nacchio; Metromedia Fiber Network Inc. Chairman Stephen Garofalo; and Clark McLeod, former chief executive of local telephone company McLeodUSA Inc., all directed lucrative investment banking deals of their respective companies to Salomon. In a practice known as “spinning,” Salomon in return allocated the executives shares of hot IPOs, which they typically sold within days, reaping millions of dollars in profits, Spitzer said. These executives were “personally bought off by being given IPO allocations,” Spitzer said at a news conference Monday. The attorney general said the arrangement also presupposed that Salomon’s star research telecommunications analyst, Jack Grubman, would give the company’s stock a favorable rating. “The spinning of hot IPO shares was not a harmless corporate perk,” Spitzer said. “Instead, it was an integral part of a fraudulent scheme to win new investment banking business.” Spitzer said that his investigation revealed that Ebbers made more than $11 million from spinning IPO shares. Anschutz and Nacchio of Quest made $5 million and more than $1 million, respectively. McLeod pulled in more than $9 million, and Garofolo netted more than $1.5 million, according to the complaint filed in Manhattan Supreme Court Monday. In addition, the defendants each earned between $16 million and $1.4 billion by selling their own companies’ shares, including those received in stock options. Salomon kept artificially high ratings on the stocks so the executives could sell at high prices, Spitzer alleged. He is seeking disgorgement of the profits earned in the transactions, which total some $1.5 billion, he said. In return for its alleged largess, Salomon reaped some $240 million in underwriting and fees for banking deals it handled for the companies. Spitzer said, however, that Salomon and Grubman, who recently left the firm, are not named in the complaint because the state is in settlement talks with both parties. MARTIN ACT In his campaign against Wall Street wrongdoers, the attorney general is well armed with the Martin Act, a New York state law that is frequently described as the toughest securities law in the country. Not only does the act give Spitzer the unusual authority to prosecute fraud without having to prove intent, but it also provides for steep civil and criminal penalties, including jail terms. The use to which Spitzer is putting the 80-year-old law, however, is entirely novel. “We are witnessing history here,” said David J. Kaufmann, an expert on the Martin Act and senior partner at Kaufmann, Feiner, Yamin, Gildin & Robbins. “What [Spitzer] is doing is brand-new, fascinating and compelling. “He is using the fraud provision of the Martin Act to go after executives who defrauded their companies’ shareholders by suggesting that they were steering the bank business for all the right reasons, when in fact it was for all the wrong reasons,” Kaufmann explained. Even Spitzer described his evocation of the Martin Act as “a first-of-its-kind legal action.” Yet Kaufmann, who co-authors a commentary on the act in McKinney’s Consolidated Laws of New York, said he was “very confident that if the attorney general is able to sustain the allegations, then Martin Act liability will surely follow.” “Corporate officers are supposed to act in the best interest of the shareholders,” he said, “not in the best interest of their personal pocketbooks.” Spitzer has evoked the Martin Act before in his ongoing crusade against dubious Wall Street practices. In April, he accused Merrill Lynch & Co. of pressuring its research analysts to tout the stocks of companies that were clients of its investment banking division. Merrill, which did not admit wrongdoing, nonetheless settled with Spitzer in May for a $100 million fine and a pledge that it would sever the tie between banking and analyst compensation. The lawsuit against Merrill is part of a much wider investigation of the connections between investment banking and research on Wall Street, one that Spitzer had initiated as long ago as last summer. And as is evident from Monday’s lawsuit, the attorney general is still hot on Wall Street’s trail. He made clear Monday that other analysts, executives and brokerage firms were still under investigation. “We believe the practice of spinning is widespread,” he said, describing the case against Ebbers and the others as “illustrative.” Nonetheless, Spitzer said, he thought “substantial progress” has been made. “There is a world of difference between April 8 [the day he filed the Merrill lawsuit] and today.” For their part, most of the defendants appeared to be trying to keep a low profile. Lawyers for Ebbers, Anschutz Garofalo and Grubman did not return calls seeking comment. Salomon also declined to return a call seeking comment. One defense attorney did address the charges. The lawyer for Quest’s Nacchio, Charles Stillman of New York’s Stillman & Friedman, said that the claim against his client is “totally false.” “In fact, in the most important transaction in Mr. Nacchio’s business life, the acquisition by Qwest of US West, Salomon lined up against Quest and represented Global Crossing,” he said. “Once all the facts are known, we are confident that Mr. Nacchio will be completely vindicated.” Ebbers is being represented by Reid H. Weingarten of Steptoe & Johnson; Garofolo by Barry Bohrer of Morvillo, Abramowitz, Grand, Iason & Silberberg; Grubman by Lee S. Richard of Richard, Spears, Kibbe & Orbe. Counsel for McLeod could not be determined by press time. Additional reporting was provided by Sam Roseme.

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