As Stock Trader, Ebbers Flourished

Former WorldCom Inc. Chief Executive Bernard Ebbers must have been very busy building up the telecom firm from 1996 through 2000, given the company’s 789% reported revenue growth in that five-year stretch.

Even so, Ebbers also found time to be an active private investor in that period, according to documents released last week by the House Financial Services Committee.

Ebbers received shares in 21 initial public stock offerings from 1996 through 2000, brokerage Salomon Smith Barney reported in a summary it was ordered to turn over to the committee, which is investigating WorldCom’s collapse.

Many of the IPOs Ebbers got were highly coveted by other investors, which was demonstrated by the hefty gains the stocks made in their first few trading days. And the data show Ebbers generally was not the buy-and-hold type--even as telecom analysts at Salomon and other brokerages urged other investors to hang on.

In early August 2000, for example, Salomon allocated to Ebbers 5,000 IPO shares of Signalsoft Corp., a wireless telecom services firm. Ebbers paid the IPO price of $17 a share.

On Signalsoft’s first trading day, the stock soared 29%. As it continued to rise in the weeks after the IPO, Ebbers sold out. He let go 2,500 shares on Aug. 16, 2000, at $23 each, then sold 1,000 at $41 each on Sept. 5. The final 1,500 shares were sold on Sept. 15 at $30.39 each, according to the Salomon documents.

Ebbers’ total profit before taxes on the Signalsoft deal: $59,093, or a 70% return on his $85,000 investment in six weeks.

The House committee’s IPO probe is turning up more than the inevitable rubric that the rich get richer. Congress wants to know about these stock deals with executives such as Ebbers because they open a window onto the Wall Street practices that helped inflate the bull market bubble of the late 1990s--the bursting of which has wiped out trillions of dollars of paper market wealth.

Salomon Smith Barney, responding to the committee’s subpoenas in recent weeks, detailed how it allocated much-desired IPO shares in the late ‘90s to WorldCom officials and how it received expressions of interest in IPOs from a host of other telecom industry executives.

The telecom business was very good to Salomon: From 1997 through 2001 the brokerage handled more stock and bond underwriting for the telecom industry than did any other Wall Street firm, according to data tracker Thomson Financial.

For its efforts, Salomon earned $1.5 billion in fees from telecom companies in that five-year period, Thomson calculated.

The key question the House committee has posed is whether there was a connection between the IPO allocations to executives like Ebbers and the lucrative underwriting work those executives’ companies awarded Salomon.

Under securities laws, such an explicit connection, if undisclosed, would be illegal.

Salomon, in a letter Friday to the two senior members of the House committee--Rep. Michael G. Oxley (R-Ohio) and Rep. John J. LaFalce (D-N.Y.)--repeated what it has stated before: “We have found no evidence that shares in IPOs were allocated as a quid pro quo for investment banking business,� wrote Jane C. Sherburne, deputy general counsel at Salomon parent Citigroup Inc.

A Perk for Top Clients

Brokerages say they typically award hot IPO shares to their best customers. That isn’t against the law; indeed, it would make no sense for a brokerage to give such shares to its unimportant customers--say, those with little wealth or influence.

“The WorldCom officers and directors at issue were among Salomon Smith Barney’s best individual customers,� Sherburne wrote. “In fact, their individual accounts put them in approximately the top 1% of SSB retail clients.�

None of that may come as a huge surprise to the committee or to the general public.

But the extent to which Ebbers and other executives received IPO shares from 1996 through 2000, and the size of some of the individual grants, moved Citigroup to concede last week that “some allocations to corporate officers and directors ... while lawful, were sufficiently large as to raise questions about the appearance of conflicts.�

The public’s sensitivity to the allocations is higher because of what has since transpired with WorldCom: its plunge into bankruptcy this summer after revelations that the firm misreported billions of dollars in expenses to make its financial position appear relatively rosy in recent years. Ebbers, who resigned as CEO in the spring, is under federal investigation but has not been charged with wrongdoing.

From 1996 through 2000, Ebbers was granted a total of 869,000 IPO shares, most of which were telecom-related firms. Some were not, however: He was given 5,000 IPO shares of watch maker Tag Heuer in 1996; in 1999 he got 5,000 IPO shares of United Parcel Service.

In all, Ebbers made money on 17 of the 21 IPOs. His net gain on the deals, before taxes: $11 million.

He profited largely by selling out of the stocks well before one year was up. His average holding period for the IPOs was 224 days, according to Salomon.

Had Ebbers held on, he might have lost millions of dollars instead of making money, because many of the telecom shares he received--including Qwest Communications International, Rhythms Netconnections and Metromedia Fiber Network--have since crumbled. By selling all of his Qwest shares within two months of the IPO in 1997, Ebbers earned $1.9 million.

Still, he could have made much more by waiting to sell as the telecom stock mania peaked, driving Qwest as high as $64 in 2000.

Ebbers earned nearly $4.6 million by selling his Metromedia Fiber shares between February and October of 1998, after winning the IPO allocation in October 1997. But as with Qwest, he missed the biggest runup in Metromedia’s shares, which took the price to nearly $50 in 2000.

If Ebbers was too early in selling many of his shares, one of his holdings illustrates what the penalty would have been for taking a truly long-term view: He apparently still owns shares of Williams Communications Group, a 1999 IPO. Salomon said Ebbers has an unrealized loss of $804,405 on his Williams investment.

Williams, like WorldCom, is in bankruptcy proceedings.

Who Called the Moves?

It isn’t known whether Ebbers personally directed the purchases and sales of the IPO shares he received, or whether some or all of the decisions were made by his Salomon broker. A call to Ebbers’ lawyer, Reid H. Weingarten, was not returned Friday.

Besides the question of a quid pro quo for IPO allocations, one issue that may interest Congress is whether Ebbers and/or his broker were selling while telecom analysts at Salomon and other Wall Street firms were exhorting individual investors to continue buying the shares in question, providing an eager audience.

The House Financial Services Committee in July grilled Salomon’s star telecom analyst, Jack Grubman--who had a close personal relationship with Ebbers--on why he remained so bullish on many telecom issues, even as they collapsed this year.

“I always wrote what I believed,� Grubman has insisted. He resigned from Salomon in mid-August, saying the negative publicity about his record made it impossible for him to continue in the field.

In any case, it may be hard to argue with bullish calls on telecom IPOs from 1996 through 1999 by Grubman or other analysts. They were right that the stocks were going higher, thanks to the final massive wave of tech and telecom mania that swept the market early in 2000.

By then, Ebbers already had dumped most of his IPO shares. He missed the peak, but he still has what many buy-and-hold tech stock investors do not have: a big profit to show for his efforts.

Tom Petruno can be reached at [email protected]. For recent columns on the Web go to: www.latimes.com/petruno.