Citigroup offered top executives IPO shares

Memos show company allocated stock to leaders of client firms

August 29, 2002|By BLOOMBERG NEWS

NEW YORK - At least a dozen U.S. telecommunications executives and investors may have received initial public offering shares from Citigroup Inc., memos from the world's largest financial-services company show.

Executives of Citigroup's corporate clients were offered IPO shares that could be sold at a profit within hours or days, the memos show.

Copies of the 1999 memos were sent to Citigroup's private client services and equity capital markets departments, as well as to Jack B. Grubman, the top telecommunications analyst for Salomon Smith Barney Inc., Citigroup's brokerage.

Among 26 names on the documents turned over to House investigators were Philip F. Anschutz, Qwest Communications International Inc.'s founder; Stephen A. Garofalo, chairman and former CEO of Metromedia Fiber Network Inc.; and Roy A. Wilkens, former chairman of Williams Communications Group Inc.

All of the public companies on the lists did business with Salomon Smith Barney Inc.

"Allocations to good corporate clients have been going on for years," said Ira L. Sorkin, former head of the Securities and Exchange Commission's New York office and a law partner at Carter, Ledyard & Milburn in New York. "It doesn't smell good [to investors]."

The House investigation is seeking to determine if Citigroup awarded IPO shares in exchange for future investment-banking business.

Regulators also are looking into whether analysts such as Grubman promoted stocks of companies that were investment-banking clients of their firms.

The memos specify the number of shares in two IPOs - Juno Online Services Inc. and Rhythms NetConnections Inc. - that each executive was interested in buying. Brokers Rick Olson and David Trautenberg sent the memos to Jim Cowles, who helped oversee stock issues at Salomon.

Citigroup told investigators that executives who received IPO shares were awarded them because of their status as wealthy individual clients of Salomon Smith Barney, rather than because of their corporate affiliations. Citigroup's investment-banking business played no role in the awards, the company said.

The list of potential IPO share recipients lists each executive and his company.

"The memos merely indicate expressions of interest, as is consistent with the allocation process," said Salomon spokeswoman Susan Thomson in a statement. "There was a huge difference between what people wanted and what they got."

Anschutz personally received no IPO allocations, said Craig D. Slater, president of Anschutz Corp.'s investment arm. "It's logical that, as a big trader, we would have received allocations," he said.

Anschutz and the Denver company that bears his name were original founders of Qwest. Slater said he doesn't know whether Anschutz Corp. bought Rhythms or Juno.

Garofalo "was a Salomon customer and as with other similarly situated customers, he was given an opportunity - which in his case was a relatively small allocation - to participate in IPOs," said Barry Bohrer, Garofalo's attorney. "It had nothing to do with investment banking business. There were others at his company that made investment banking decisions, and he was not in the loop."

Garofalo founded Metromedia Fiber in 1993, has served as chairman since its inception and as chief executive officer from October 1996 to September 2001, according to Metromedia Fiber's Web site.

Wilkens couldn't be reached for comment.

Since 1998 Salomon Smith Barney handled more than $6 billion in stock, bonds and convertible bond sales for Level 3 Communications Inc., according to Bloomberg data. Level 3 Chairman Walter Scott Jr. appears on both memos, seeking 100,000 shares of Rhythms and of Juno.

The number "2,000" is handwritten next to Scott's name on the Rhythms memo. A separate document shows that Scott received 250,000 shares in the Qwest Communications International IPO. Salomon took Qwest public in June 1997.

Scott didn't return calls asking for comment. Level 3 spokesman Arthur Hodges declined comment on Scott's behalf.

Also among those listed were Clark McLeod, former chief executive of local telephone service company McLeodUSA Inc.; Steve W. Hooper and Wayne M. Perry, former CEOs of Nextlink Communications Inc., renamed XO Communications Inc. ; James Voelker, former Nextlink president; Howard A. Neckowitz, chairman and CEO of Pacific Gateway Exchange Inc.; Alex J. Mandl, former chairman of phone and data service provider Teligent Inc.; and Joseph P. Nacchio, Qwest's former chairman and CEO.

Rhythms more than tripled on its first day of trading in April 1999. Juno fell below its offering price on its first day of trading in May 1999 but more than doubled by the end of the next month.

The House Financial Services Committee is focusing on shares allotted to executives of WorldCom Inc. and Global Crossing Ltd., companies that collapsed this year. WorldCom's bankruptcy is the biggest in history.

Former WorldCom CEO Bernard J. Ebbers is also listed on both memos as being interested in buying 300,000 shares of each IPO. The number "10,000" is handwritten next to his name on the Rhythms memo, and according to a chart of actual allocations, he received 10,000 shares.

Ebbers received shares in several other IPOs, according to the chart. WorldCom paid Salomon $80 million in banking fees between 1998 and 2001, according to Grubman's congressional testimony.

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