In a precedent-setting decision, Justice Richard B. Lowe of State Supreme Court in Manhattan held that Clark McLeod, the former Chairman and CEO of McLeodUSA, fraudulently failed to disclose his participation in a stock "spinning" scheme with an investment bank, Salomon Smith Barney (SSB). Spinning is the practice by which investment banks give executives shares of hot IPOs as an inducement to generate or retain underwriting business.
Describing the scheme as a "sophisticated form of bribery," the court found that McLeod had received 34 IPO stock allocations from SSB, which he sold for a personal profit of $9.96 million. During the same period, SSB received more than $77 million in underwriting business from McLeodUSA, which eventually went bankrupt in 2002.
Justice Lowe held: "In light of the fact that McLeod has admitted that he sought and received ‘hot IPO’ stock allocations on multiple occasions and did not make any disclosures on any of those occasions, the court finds that he has engaged in ‘repeated’ and/or ‘persistent’ fraudulent acts in violation of the [State Executive Law] …."
Justice Lowe also found that McLeod’s non-disclosures were fraudulent under the Martin Act "because they clearly ‘tend[ed] to deceive or mislead the purchasing public…."
Attorney General Spitzer said of the decision: "We are gratified that New York courts have recognized that undisclosed stock spinning is illegal and deceives the public. This decision sends a message that executives who put their own interests ahead of their shareholders’ will be held accountable."
In 2002, the Attorney General filed an action against five telecom executives, charging that they violated New York law by engaging in spinning schemes with SSB in the late 1990s. Four of the executives - Bernard Ebbers of WorldCom, Philip Anschutz and Joseph Nacchio of Qwest Communications, and Stephen Garofalo of Metromedia Fiber Networks - reached settlements with the Attorney General’s office.
The Attorney General’s office resolved spinning claims against SSB as part of a landmark $1.4 billion Global Settlement with major Wall Street firms in April 2003.
Unable to reach a resolution with McLeod, the Attorney General prosecuted the state’s claims, which were presented to the court in a motion for summary judgment. In his decision, Justice Lowe found evidence was unrefuted that McLeod had participated in an undisclosed spinning scheme, and granted judgment to the state. The court will now schedule a hearing to determine the amount of damages and restitution that McLeod must pay.
The McLeod litigation is being handled by Assistant Attorneys General Andrew Lorin and Zachary Sturges.
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