Crony Capitalism

It's one thing to imagine how Wall Street works. It's another to see the actual numbers. Even scandal-weary investors couldn't help but be stunned last week upon learning that Salomon Smith Barney allowed Bernard Ebbers, WorldCom's former chief executive, to help himself to nearly one million hot initial public offering shares during the recent bubble, for a personal gain of more than $11 million.

This does not look good for Citigroup, which acquired Salomon Smith Barney in 1998 and provided the I.P.O. allocation numbers to the House Financial Services Committee. The panel is investigating what role conflicts of interest on Wall Street may have played in recent corporate scandals.

During the late-90's dot-com mania, I.P.O. shares often saw their value more than double on the first day of trading. The House panel now wants to determine whether Salomon made the shares available to executives of big corporate clients at the original offering price, even after the first-day jump in value, providing them with a guaranteed windfall.

Favored access to these offerings was just one more way in which some executives enriched themselves while running their companies into the ground. Scott Sullivan, WorldCom's former chief financial officer, who was indicted last week for allegedly orchestrating the largest accounting fraud in history, also appeared on Salomon's I.P.O. distribution lists.

The underwriters for these offerings have traditionally doled out a limited pool of shares to top brokerage clients. Salomon maintains that Mr. Ebbers was a deserving client solely on the basis of his personal brokerage account. The firm insists that its generous distribution of shares had nothing to do with the fact that Mr. Ebbers was chief executive of a company that brought in tens of millions of dollars in investment-banking fees to Salomon. Establishing that the I.P.O. shares were allocated in exchange for investment-banking business could elevate these dealings from the unseemly to the illegal.

t's one thing to imagine how Wall Street works. It's another to see the actual numbers. Even scandal-weary investors couldn't help but be stunned last week upon learning that Salomon Smith Barney allowed Bernard Ebbers, WorldCom's former chief executive, to help himself to nearly one million hot initial public offering shares during the recent bubble, for a personal gain of more than $11 million.

This does not look good for Citigroup, which acquired Salomon Smith Barney in 1998 and provided the I.P.O. allocation numbers to the House Financial Services Committee. The panel is investigating what role conflicts of interest on Wall Street may have played in recent corporate scandals.

During the late-90's dot-com mania, I.P.O. shares often saw their value more than double on the first day of trading. The House panel now wants to determine whether Salomon made the shares available to executives of big corporate clients at the original offering price, even after the first-day jump in value, providing them with a guaranteed windfall.

Favored access to these offerings was just one more way in which some executives enriched themselves while running their companies into the ground. Scott Sullivan, WorldCom's former chief financial officer, who was indicted last week for allegedly orchestrating the largest accounting fraud in history, also appeared on Salomon's I.P.O. distribution lists.

The underwriters for these offerings have traditionally doled out a limited pool of shares to top brokerage clients. Salomon maintains that Mr. Ebbers was a deserving client solely on the basis of his personal brokerage account. The firm insists that its generous distribution of shares had nothing to do with the fact that Mr. Ebbers was chief executive of a company that brought in tens of millions of dollars in investment-banking fees to Salomon. Establishing that the I.P.O. shares were allocated in exchange for investment-banking business could elevate these dealings from the unseemly to the illegal.