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August 31, 2002

Salomon's IPO Tech Headache

By Colleen Marie O'Connor

As Congress picked at the remains of telecom high-flyers, another IPO scandal threatened the reputation of Salomon Smith Barney.

A former broker for Citigroup's sprawling brokerage house alleges that the firm allocated hot IPO shares to telecom executives in exchange for investment banking business.

David Chacon filed suit in Los Angeles Superior Court on July 18 this year, alleging that, after he complained about unfair IPO allocation practices at Salomon, he was fired in July 2000.

Top Executives

Chacon, a broker at a Salomon branch in Los Angeles, contends that the firm doled out so many shares to top telecom executives that some of his own clients were shutout. The suit also seeks restitution for those clients.

Some of today's most notorious CEOs are cited as alleged beneficiaries. The group includes Bernard Ebbers of WorldCom; Joseph Nacchio of Qwest Communications International; Clark McLeod of McLeodUSA; and James Crowe of Level 3 Communications. Stephen Garofalo, chairman of Metromedia Fiber Network, is also cited.

In an interview, Chacon said that Salomon's star telecom analyst, Jack Grubman, played a key role in deciding the IPO allocations.

During recent Congressional testimony about the WorldCom fiasco, Grubman was asked if top executives at WorldCom received allocations of hot IPOs. Grubman stated he could not recall.

A spokesperson for Salomon said that "the charges are without merit," adding that Chacon's suit contained factual inaccuracies.

The charges, nonetheless, have added more fuel to the worsening crisis of confidence in the capital markets.

"The IPO allocation process is broke, and it's worse than broken, it's corrupt," said Patrick Byrne, chief executive of Overstock.com, which went public on May 29.

"If you really want to fix Wall Street," he added, "I think half the problem is really the IPO allocation process. It pits the bank's interest against their clients' interest and everybody knows it and everyone is in on it."

Traditional Manner

Overstock obviously took Byrne's words to heart. Its $39 million offering was not completed in the traditional manner. Instead, it was led by W.R. Hambrect, using the I-bank's OpenIPO platform.

Credit Suisse First Boston was fined late last year for how it handled IPO allocations. New York State Attorney General Eliot Spitzer fined Merrill Lynch $100 million for its analyst reports, many of which focused on newly-public companies.

Unexploded Bomb

Perhaps the largest bomb is unexploded. As Traders Magazine went to press, a massive piece of IPO related litigation remains before U.S. District Judge Shira Scheindlin. The suit alleges broker tie-in agreements and laddering schemes from new issues that took place between 1999 and 2000.

Chacon's lawsuit, however, appears to be the first linking allocations stemming from the hot IPO market with companies that have imploded because of the current accounting scandals.

Few IPOs will be able to move through Wall Street unless these scandals are resolved. The sense of public outrage has emboldened public officials to join in the controversy. A system must be invented, some critics say, that allows the average retail investor to have a chance to purchase new offerings.

The controversial hot technology IPO run-ups were numerous. And the reputations of Several Wall Street firms were hurt in the process.

Colleen Marie O'Connor is a senior editor at The IPO Reporter, a sister publication of Traders Magazine.