Spinning is the practice of investment banks providing shares in popular flotations to senior executives at client companies in the hope of winning lucrative corporate finance work from them later on. FSA launches probe into share 'spinning' CITY BANKS TO BE ASKED ABOUT PREFERENTIAL IPO ALLOCATIONS Financial Times (London,England) October 24, 2002
MILLIONS of investors rushed into the stock market in the 1990's, believing that Wall Street was at least a fairly level playing field. Although they have since learned how illusory that notion was, the myth of democracy on Wall Street took a real beating last week.
One look at the Salomon Smith Barney documents detailing its allocation of initial public offerings, subpoenaed and just released by Congress, showed individual investors why they couldn't get the hot stocks that raced skyward during the mania. Ahead of them in line at most big firms were grasping executives who had a far greater chance of bagging hot stocks because their companies were paying investment banking fees to the firms doing the doling.
What the firms were really dispensing was free money. That is because the firms bringing shares public routinely and excessively underpriced them. An analysis by Sanford C. Bernstein & Company in 1999 showed that the median underpricing of initial offerings, which had been less than 5 percent in the early 1990's, rocketed to 30 percent that year.
That represented a heap of money left on the table by companies selling stock. It now appears that brokerage firms used this pile to reward already wealthy executives whose companies were, or might become, their customers. Another Slap at Democracy On Wall St. The New York Times September 1, 2002
This page documents the way in which bankers and analysts illegally diverted lucrative share offers away from the public to solicit business from wealthy business colleagues, a form of bribery.
On the previous page I used the relationship between bankers and analysts as the focus of my discussion in order to keep it simple. It was more complex than this and there were several other frauds including "spinning". This was simply a nice word for legally offering bribes to senior executives of companies by using share options. The bribes were to get company executives to put their company's financial services the banker's way.
Positive analyst's reports and share spinning can both be seen as bribes - a kickback in return for business. Citigroup's Smith Barney was not the only investment bank alleged to be doing these things but it was the leader.
There is little evidence that banks are as willing to issue a mea culpa over how they award shares in newly listed companies. A grand jury is reviewing evidence that several of Wall Street's biggest banks effectively demanded kickbacks from institutional clients in return for giving them lucrative shares in initial public offerings.
This lawsuit and others claim that hedge funds and other institutional investors were awarded large chunks of IPO shares in return for a promise that the bank would receive a certain percentage of it back in commission fees. Asking for kickbacks and "laddering" a stock, by making an investor pay for more shares at higher prices later, is illegal.
Yet such practices were hugely lucrative during the dot.com boom, when investors clamoured to buy shares that gained more than several hundred per cent in a day. The great Mom and Pop rip-off: The Guardian (London) June 1, 2001
The Goldman Sachs Group and Credit Suisse First Boston are being investigated by the House Financial Services Committee, which is widening its inquiry into conflicts of interest in allocations of initial share offerings at securities firms. House Committee Broadens Its I.P.O. Inquiry The New York Times September 5, 2002
For some strange reason an investment banker could legally sell a proportion of the shares in the IPO's it was managing to whomever it chose at a low opening price before offering them on the market.
"There's nothing wrong with favoring your best customers," said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels in New York.
The violation would involve the failure to disclose to investors that significant numbers of shares were being allocated to executives of large clients. Ebbers Got Million Shares In Hot Deals The New York Times August 28, 2002
Bernard J. Ebbers, WorldCom's former chief executive, made more than $11 million in four years on 21 hot stock offerings he received from Salomon Smith Barney, according to documents released yesterday by the House Financial Services Committee. Ebbers Made $11 Million on 21 Stock Offerings The New York Times August 31, 2002
The share listings offered to the public were invariably oversubscribed. Their prospects had been beaten up by the analysts. Members of the public received only small allocations. The number available to the public were decreased by the number the bankers offered to their corporate "friends" - sometimes a considerable proportion. They then sold them on to the enthusiastic public at a large profit.
In recent months, Congressional investigations have disclosed the widespread practice on Wall Street of giving shares of initial public offerings -- which often jumped in value in the first days of trading -- to preferred and prospective clients in what appeared to be an effort to bolster investment banking business. Salomon Talks To the S.E.C. About Settling Conflict Cases The New York Times September 28, 2002
First Boston and Salomon Smith Barney engaged in "inappropriate spinning" of hot new stocks. They sold shares to top corporate executives in return for banking business from the executives' companies. The executives could then sell the stock at a profit. WALL STREET SETTLEMENT: MARKET PLACE; In Wall Street Hierarchy, Short Shrift To Little Guy The New York Times April 29, 2003
The Salomon documents indicate where big chunks of some of these offerings were going and therefore why it was hard for small investors to get in on the deals.
"Many corporate officers had partnership accounts in different names," Mr. Chacon said. "You'd see multiple allocations to the same individual under different names." Ebbers Got Million Shares In Hot Deals The New York Times August 28, 2002
But ordinary investors were unable to buy shares until after prices had risen on the first day of trading. In most cases they are now left nursing huge losses. Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals: Financial Times (London,England) October 4, 2002
Grubman became so powerful that he had a major say in how the IPO pot of gold could be spread for maximum benefit to Citigroup. He must have had Weill's strong backing to intrude into this area. It had nothing to do with an analyst's job.
But the former employee said the telecom executives had routinely been among the top recipients of the stock in each Salomon offering. They received shares that Salomon held back from other clients, this person said, adding that the allocations had been made to executives when Salomon wanted to build relationships with the executives' companies or keep existing relationships strong. These executives were, in effect, part of an exclusive, very prosperous club, and membership was controlled by Mr. Grubman.
Mr. Grubman routinely got a list of favored clients for each new stock offering for review, the former Salomon employee said, and changed the allocations if he did not deem them appropriate. I.P.O. Plums For Titans Of Telecom The New York Times August 4, 2002
WorldCom's image problems are worsened by the potential involvement of some of its executives in an investigation into whether Jack B. Grubman, the Salomon Smith Barney analyst who was Wall Street's most influential telecommunications analyst during the 1990's, illegally curried favor with WorldCom and other potential clients by funneling opportunities to invest in initial public offerings their way. During the 1990's, share prices often leaped sharply on the day of the offering, creating quick and huge profits for investors with shares. WorldCom Chief Tries to Reassure Customers The New York Times August 10, 2002
It was illegal to offer these early share options with the intention of soliciting business or rewarding someone for giving the bankers business. What other reason there would be for giving these options is difficult to understand?
John C. Coffee, a law professor at Columbia University, called Mr. Spitzer's suit "the broadest, most frontal attack saying these transactions amounted to commercial bribes: hot stock for investment banking business." Mr. Coffee said, however, proving such a quid pro quo would be difficult.
"This is just plain old-fashioned bribery and extortion," Mr. Liddle (lawyer for Mr Chacon) said. "They're just using a different currency." Spitzer Sues Executives Of Telecom Companies Over 'Ill Gotten' Gains The New York Times October 1, 2002
How anyone could possibly prove what the intention was unclear - unless of course it was so brazen that the bankers own staff spoke out or that they documented their reasons somewhere - but this is what Grubman, Smith Barney and others did. It was not until after the bubble had burst that authorities actually looked for these clues. While WorldCom executives were the most prominent beneficiaries many others queued up at the trough.
Banks were entitled to give shares in hot initial public offerings to favoured clients provided there was no understanding that the share allocations were given expressly to generate further banking business.
The Securities and Exchange Commission, the US's chief financial regulator, concluded in a study three years ago that there was no case to bring against the banks, especially since there was no evidence of a promise to give business in return.
Under federal securities law, the transactions would have to be shown to be commercial bribery to be considered illegal. Arthur Levitt, previous head of the SEC, told the Financial Times recently that he abhorred the IPO allocation practices and that they looked to him "like commercial bribery".
Lawyers say a distinction could be drawn between allocating shares to executives whose companies are already investment banking clients and doling out shares in the hope of wooing a new client. But without an incriminating paper or e-mail trail, it would be hard to press charges. Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals: Financial Times (London,England) October 4, 2002
Using hot stock offerings as a reward for past business or an inducement for future business could violate securities laws, according to Lewis D. Lowenfels, an authority on securities laws at Tolins & Lowenfels in Manhattan. "And if it was done willfully and intentionally, it could possibly become a criminal case," he said. Lawsuit Says Salomon Gave Special Deals to Rich Clients The New York Times July 18, 2002
Officers and directors of WorldCom received thousands of shares of hot initial public offerings from Salomon Smith Barney in the late 1990's, according to documents delivered late yesterday by the firm to a Congressional committee investigating the collapse of WorldCom.
The documents submitted by Salomon, which were delivered in response to a subpoena, also indicated that Jack B. Grubman, the firm's former star telecommunications analyst, was part of the allocation process when shares of initial offerings were doled out to WorldCom executives. Salomon Gave A Big Helping Of New Stocks To WorldCom The New York Times August 27, 2002
It's one thing to imagine how Wall Street works. It's another to see the actual numbers. Even scandal-weary investors couldn't help but be stunned last week upon learning that Salomon Smith Barney allowed Bernard Ebbers, WorldCom's former chief executive, to help himself to nearly one million hot initial public offering shares during the recent bubble, for a personal gain of more than $11 million. Crony Capitalism The New York Times September 2, 2002
Philip F. Anschutz, the former chairman of Qwest Communications, agreed yesterday to give up $4.4 million in personal profits from shares in hot stock offerings - - - .
Mr. Anschutz is a founder of Qwest, a telecommunications company that provides voice, data and Internet services over its fiber optic network. As Qwest chairman, he was allocated shares in 57 hot public offerings from 1996 to 2001 and sold all of those shares, for a gain of $4.8 million, prosecutors said.
- - - - - - the millions of dollars in public offering gains -- $11.5 million for Mr. Ebbers, $9.4 million for Mr. McLeod and $1 million for Mr. Nacchio - Former Chairman Of Qwest Agrees To Give Up Gains From Stock Deals The New York Times May 14, 2003
Smith Barney's response to the allegations was a "so what". This was simply standard practice and there was nothing wrong with it. That was undoubtedly the way they and Weill saw it. It had been sanctified by the earlier SEC investigation. They also seemed to think it was legitimate to fudge the truth but they did not claim that. The morality was never considered.
Ms. Sherburne (for Citigroup) added that the WorldCom officers and directors were very substantial clients of Salomon and were among the firm's best customers. The Securities and Exchange Commission "has repeatedly recognized without criticism that securities firms typically allocate I.P.O. shares to their best customers," Ms. Sherburne's letter said.
Salomon has maintained that Mr. Grubman had no responsibility for allocations of initial offerings, but a former employee of the firm close to the process said that Mr. Grubman routinely received a list of favored clients for each new stock offering for review and changed the allocations if he did not deem them appropriate. Salomon Gave A Big Helping Of New Stocks To WorldCom The New York Times August 27, 2002
Also released yesterday was a Salomon memorandum dated March 31, 1999, that lists clients interested in receiving shares - - - - - . One Salomon employee receiving the client list was Jack B. Grubman, - - - . This confirms that Mr. Grubman was centrally involved in the initial public offering allocation process at the firm, as former employees of Salomon have said.
"These documents certainly show that this was a farflung enterprise at Salomon connecting the research department, the underwriting area, the retail brokers and directly aggregating all the people who were in the so-called telecom mafia to be the beneficiaries," said Jeffrey L. Liddle, a lawyer - - - representing Mr. Spartis and David Chacon - - - . Ebbers Got Million Shares In Hot Deals The New York Times August 28, 2002
With Grubman and other analysts raving about the prospects of these companies during the DotCom bubble the share prices rose dramatically after the IPO sometimes doubling or trebling. The sensible people who sold them at that stage doubled or trebled their money - laughing all the way to the bank.
In 1999, according to Sanford C. Bernstein & Company, the brokerage firm, new stocks rose an average of 60 percent in their first day of trading. From 1986 to 1994, the average first-day move was 10 percent. Ebbers Got Million Shares In Hot Deals The New York Times August 28, 2002
Such stocks often rocketed in their first day of trading, generating enormous profits to those lucky enough to buy them when they were issued and sell them before they fell. Salomon Gave A Big Helping Of New Stocks To WorldCom The New York Times August 27, 2002
He (Mr. Abramson was fired from Juniper) said the company had given him no reason for his dismissal, but he suspects that he was terminated because he had been vocal with superiors about what he described as Juniper's reneging on a plan to assign 100,000 I.P.O. shares to the Community Foundation Silicon Valley.
"The company had internally announced the charitable contribution," he said. "But when it came time to place those shares in the Community Foundation, it meant nothing." Juniper's shares went public at $34 in June 1999 and traded as high as $243 in October 2000. I.P.O. Plums For Titans Of Telecom The New York Times August 4, 2002,
If you kept the shares the companies went bankrupt and you lost it all. The analysts maintained a barrage of advice against selling.
The initial offering in November 1999 was issued at $20.81 a share and sold by Morgan Stanley. Of the 1.4 million shares allocated to employees of Qwest, Mr. Nacchio got 90,000, or about 6 percent, of the allocation. Mr. Mohebbi received 30,000, or 2 percent.
A spokesman for Mr. Mohebbi said that he had received the shares as part of an offering that was made to all employees of Qwest. A few months after the offering, in early 2000, KPNQwest stock quadrupled, to $86. It now trades at 12 cents. I.P.O. Plums For Titans Of Telecom The New York Times August 4, 2002
In a Feb. 21, 2001, e-mail message cited in the complaint, Mr. Grubman threatened to "put the proper rating" on the stock of Focal Communications, which he said every smart institutional investor "feels is going to zero." Mr. Grubman had reiterated his buy rating that day, with the stock trading at $15.50 a share, but indicated he believed he should lower it three notches.
He kept his buy on Focal's stock for five more months. By then, it had dropped to $1.24, the complaint said. Spitzer Sues Executives Of Telecom Companies Over 'Ill Gotten' Gains The New York Times October 1, 2002
Shares in IPOs were apparently not the only perks given to senior executives of companies in order to get their business.
In addition to IPOs, other inducements were offered to lure clients, industry executives say - although banks firmly deny any direct linkage between private services offered and corporate business won. These included access to a range of closely guarded hot products such as hedge funds, property funds and private equity funds. Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals: Financial Times (London,England) October 4, 2002
David Chacon, a broker at Smith Barney claims he was fired for rocking the boat. He sued Smith Barney on behalf of his clients who were disadvantaged, publicly describing what was happening. Every action was governed by money not morality. Dissenters were not welcome in any of these businesses at this time. If you crossed Grubman you might be fired.
Jack B. Grubman, the firm's star analyst covering these businesses, played a central role in deciding which executives got how many shares, the broker said in an interview this week. All the executives ran companies that were investment banking clients of Salomon.
Mr. Chacon, 31, says that favored telecommunications executives received tens of thousands of shares in hot stock offerings underwritten by Salomon, stocks that more than doubled or tripled in value instantly. In his lawsuit, Mr. Chacon contends that the practice allowed Salomon to reward top executives personally for business their companies gave to the firm or could give to it. The practice left his clients at a disadvantage, says Mr. Chacon, whose suit also seeks restitution on their behalf.
Another former Salomon employee said that it was not uncommon for executives of telecommunications companies to call the firm's syndicate desk, which handles securities offerings, and ask about their allocations.
Mr. Chacon says that he began complaining to his immediate superiors: to the branch manager, the regional manager and upward. A memorandum, dated May 2000, that he wrote to Jay Mandelbaum, vice chairman of Salomon, describes improper allocation of hot issues and notes that superiors had told the broker that the allocation of Rhythm Netconnections shares to Mr. Ebbers was done "to encourage him" to give additional banking business to the firm. According to Mr. Chacon, he received no response from Mr. Mandelbaum. He was terminated less than two months later. Lawsuit Says Salomon Gave Special Deals to Rich Clients The New York Times July 18, 2002
In one instance, Mr Grubman recommended that Salomon sack an analyst who cautioned against some of his picks. Citigroup denies wrongdoing. Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals: Financial Times (London,England) October 4, 2002
Worse still some of those given options were allowed by Smith Barney to buy their preferential shares at the low price days after the float by which time they knew that the share price had almost doubled. It was simply money for the taking - a legal way to bribe. There was no risk.
The documents show that some of the executives' trades were not recorded in their accounts on the same day. For example, Mr. Ebbers's purchase of 300,000 shares of McLeodUSA, took place three days after the offering, when the stock was up 30 percent. Mr. Ebbers still paid the offering price of $20 a share, however. Ebbers Made $11 Million on 21 Stock Offerings The New York Times August 31, 2002
The reports indicate that Grubman, the analyst who evaluated these companies had a considerable say as to whom the share options were given. It is the large number of shares given to a small number of wealthy company executives doing business with Grubman and Smith Barney that aroused suspicion. Bernie Ebbers, WorldCom's chief executive made US $11 million from the share options he was given. Few of the shares were WorldCom shares but many were companies that subsequently did business with WorldCom. The companies offering the IPOs consequently went along with the scam. All this was a nice personal sweetener even for a multimillionaire. It oiled the wheels of business.
THE regulators investigating Wall Street firms' allocation of hot initial public offerings are likely to discover some juicy material. As they examine the records, they will find that many top executives of telecommunications companies, including Bernard J. Ebbers, founder of WorldCom, and Joseph P. Nacchio, former chief executive of Qwest Communications, received I.P.O. shares of upstart companies -- like Juniper Networks -- that had won, or later would win, contracts to sell equipment or services to the big telecom concerns.
Philip L. Spartis, a former broker (also fired by Smith Barney) who handled the WorldCom employees' stock option plan in Salomon's Atlanta office, also said Salomon had offered sweetheart allocations to several titans of telecom. I.P.O. Plums For Titans Of Telecom The New York Times August 4, 2002,
The memo, dated March 31, 1999, detailed the requests for shares of a hot new issue made by 26 wealthy and generally well-known clients of Salomon. Providing insight as it does into how one brokerage firm handled hot stock offerings for favored clients at the height of the technology stock mania, the memo may be the Wall Street equivalent of the Rosetta stone.
Because Salomon has said that it routinely rewards its best customers with shares in highly sought-after initial public offerings, the list -- and the interesting order in which the people fall -- was essentially the firm's roster of movers and shakers at the point where corporate America and Wall Street intersect.
Twenty of the 26 people named were affiliated with companies that had recently generated investment banking fees to the firm. Salomon Memo Hints at Favor on New Stock Issues The New York Times August 29, 2002
Eliot Spitzer, the attorney general of New York, sued former top officials of five telecommunications companies yesterday, contending that they had steered investment banking business to Citigroup in exchange for inflated ratings on their companies' stocks and new shares of other companies.
After filing suit in State Supreme Court in Manhattan, Mr. Spitzer said he wanted the executives, including Bernard J. Ebbers, former chairman of WorldCom, to give back more than $1.5 billion in "ill gotten" personal gains to the shareholders of the companies they ran. That sum included $28 million in profits on shares of initial public offerings and far larger gains on stock and options of their own companies.
Mr. Spitzer's suit contends that each defendant reaped gains of several million dollars on shares allocated to him by the Salomon Smith Barney unit of Citigroup, through a practice known on Wall Street as spinning. In turn, Mr. Spitzer said, each of them directed his company to pay Citigroup tens of millions of dollars in investment banking fees.
"This case exposes further conflicts of interest on Wall Street," Mr. Spitzer said. "The spinning of hot I.P.O. shares was not a harmless corporate perk. Instead, it was an integral part of a fraudulent scheme to win new investment banking business Spitzer Sues Executives Of Telecom Companies Over 'Ill Gotten' Gains The New York Times October 1, 2002
Earlier this week, documents filed by Eliot Spitzer, New York attorney- general, were even more damning. He depicted a conspiracy at Citigroup in which investment bankers, research analysts and corporate clients worked together to defraud individual investors of hundreds of millions of dollars.
Mr Spitzer described this as a form of "commercial bribery", adding: "The CEO was personally bought off by being given IPO allocations. It was wrong; it shouldn't have happened." Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals: Financial Times (London,England) October 4, 2002
The chairman of the congressional House financial services committee investigating the spinning summed it up well.
Michael Oxley, chairman of the committee, claims the scheme was supported by "possibly illegal underpricing of (initial public offering) shares", the use of "questionable" research to talk up companies that were clients and "potentially improper due diligence in bringing companies to the public markets". Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals: Financial Times (London,England) October 4, 2002
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This page created January 2004 by Michael Wynne