Five telecom execs sued over Solomon relationship

The New York State Attorney General’s office has filed civil suits against five current and former telecom executives, accusing them of improperly profiteering in initial public offerings and phony stock ratings.

The executives being sued are Philip Anschutz, former Qwest Communications chairman and currently a member of its board of directors; Joe Nacchio, former Qwest CEO; Bernard Ebbers, former WorldCom CEO; Stephen Garofalo, former CEO of Metromedia Fiber Network; and Clark McLeod, former CEO of McLeodUSA.

Qwest Communications, the only company still connected to one of the executives named in the suit, declined to comment.

The suit alleges that these executives received shares in valuable initial public offerings from Solomon Smith Barney, and that in exchange they steered investment banking business to Solomon.

In addition, the AG’s office said the relationships between these executives and Solomon “rested on a presumption that [Solomon] would deliver favorable stock ratings for the executives’ companies as an inducement for obtaining the investment banking business,” and that the executives profited from the resulting artificially inflated stock price.

As a civil suit, the accusations carry no criminal penalties. Instead, the filing seeks repayment of the allegedly ill-gotten gains. These gains range from $1.9 billion for Anschutz to $1.5 million for Garofalo.

The case against these executives is based on New York’s Martin Act and Executive Law. According to the AG’s office, these laws don’t require evidence of a direct quid pro quo between the executives and Solomon. Rather, all that must be proved is that there was a failure to reveal material facts that could influence an investment’s value.

The announcement of the lawsuits is the latest event in a series of investigations into Solomon and its high-profile former telecom analyst, Jack Grubman. Just last week, Solomon agreed to pay $5 million to settle civil charges filed by the National Association of Securities Dealers over what the organization termed “misleading research,” issued by Grubman. Other investigations into the matter, including the New York Attorney General’s inquiry into analyst conflicts at Solomon, are ongoing.

Despite all the attention the case is getting, Ernie Bergstrom, senior analyst with Instat/MDR’s advanced carrier strategies group, said the news should not affect how regulators approach the companies these executives worked for.

“Typically, it’s not the primary focus of the public utility commissions and the FCC. They look at applications for rate changes and new services and what kind of impact they have on the public. They’re really quite sensitive about going beyond their guidelines,” he said.

Such an unbiased approach would be welcomed by WorldCom, which is currently struggling to emerge from Chapter 11 bankruptcy protection, as well as Qwest, which is under investigation by the Securities and Exchange Commission.