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Post date: July 31 2006

Telecom Exec Settles Final Ipo Spinning Case

Attorney General Spitzer today announced an agreement to resolve the last in a series of fraud cases stemming from an investigation of the practice known as IPO spinning.

Clark McLeod, the former Chairman and CEO of McLeodUSA, agreed to disgorge $4.4 million in profits he received from the practice.

"IPO spinning was a deceptive, avaricious game played to benefit a few CEOs at the expense of shareholders," Spitzer said. "As a result of these cases, this practice has been banned and a significant amount of money disgorged to benefit the public."

The Attorney General sued McLeod in 2002 alleging that between 1997 and 2000, a leading investment bank, Salomon Smith Barney (SSB), secretly gave McLeod shares of 34 "hot" initial public offerings (IPOs). The shares increased in value by more than $4.8 million on their first day of trading. During the same period, McLeod directed more than $77 million of McLeodUSA’s investment banking business to SSB.

In a precedent-setting decision handed down in February 2006, Justice Richard B. Lowe of State Supreme Court in Manhattan called spinning a "sophisticated form of bribery."

Justice Lowe found that the Attorney General had submitted unrefuted evidence that McLeod had participated in a spinning scheme that violated the state’s anti-fraud statutes. The court granted summary judgment to the Attorney General and scheduled a hearing to calculate damages and restitution. Today’s settlement will obviate the need for the hearing.

The $4.4 million in disgorgement will be given to New York law schools to fund securities arbitration clinics for small investors.

The agreement concludes the last of the Attorney General’s spinning cases. Four other executives: Bernard Ebbers of WorldCom; Philip Anschutz and Joseph Nacchio of Qwest Communications; and Stephen Garofalo of Metromedia Fiber Networks previously reached agreements with the office. Disgorgement in those cases amounted to more than $6.3 million, with the money going to law school clinics, an investor restitution fund, and charities.

IPO spinning was banned as part of the landmark $1.4 billion global settlement with major Wall Street firms in April 2003.

Jay R. Ritter, professor of finance at the University of Florida, and a leading expert on IPO issues, said: "Spinning distorted corporate decision-making, harmed investors, and contributed to a general decline in the ethical standards of the financial markets. The court’s decision in this case and McLeod’s disgorgement of his profits, along with the earlier settlements, were much-needed steps that will help to increase the integrity and efficiency of the public markets." Ritter was retained by Attorney General’s office as an expert in the case.

The McLeod litigation was led by Assistant Attorneys General Andrew Lorin and Zachary Sturges, with Assistant Attorney General Patrick Findlay and Economist Hampton Finer, under the direction of David D. Brown IV, Chief of the Attorney General’s Investment Protection Bureau.


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