McLeod Agrees to Pay $4.4M in IPO Spinning Case

NEW YORK--The former chairman and chief executive officer of McLeodUSA has agreed to pay $4.4 million to resolve New York Attorney General Eliot Spitzer's probe into improper profits derived from initial public offerings, according to a press release issued July 31 by the AG's office (Spitzer v. McLeod,N.Y. Sup. Ct., No. 403855/02, 7/31/06).

Clark McLeod agreed to disgorge $4.4 million in profits Spitzer alleged he received through IPO spinning, a practice under which favored executives receive preferential shares in IPOs from Wall Street brokerages in order to secure or retain their companies' investment banking business and related fees.

Avaricious Game

In the release, Spitzer said: "IPO spinning was a deceptive, avaricious game played to benefit a few CEOs at the expense of shareholders. As a result of these cases, this practice has been banned and a significant amount of money disgorged to benefit the public." Spitzer said this agreement is the last in a series of fraud cases stemming from his office's inquiry into the practice. The $4.4 million will be given to New York law schools to fund securities arbitration clinics for small investors, according to the release.

Spitzer sued McLeod in 2002 alleging that between 1997 and 2000, a leading investment bank, Salomon Smith Barney, secretly gave McLeod shares of 34 "hot" IPOs (34 SRLR 1647, 10/7/02). 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 Salomon, according to the AG's office.

New York attorney Harold K. Gordon, Jones Day, New York, McLeod's attorney in the matter, said his client is "happy to get this litigation behind him." Gordon noted that under the settlement, there is no admission of liability on his client's behalf, and that it has the effect of dismissing all charges against him.

In February, the New York State Supreme Court justice handling the matter called spinning a "sophisticated form of bribery," and granted summary judgment to Spitzer's office (38 SRLR 298, 2/20/06 ). The settlement eliminates the need for the hearing that had been scheduled to calculate damages and restitution.

Earlier Settlements

IPO spinning was banned as part of the $1.4 billion global settlement with major Wall Street firms in April 2003. Spitzer's office previously reached IPO spinning settlements with Bernard Ebbers of WorldCom (37 SRLR 1172, 7/11/05 ), Philip Anschutz (35 SRLR 857, 5/19/03) and Joseph Nacchio of Qwest Communications (35 SRLR 1744, 10/20/03), and Stephen Garofalo of Metromedia Fiber Networks (35 SRLR 2103, 12/15/03). Disgorgement in those cases amounted to more than $6.3 million, the release noted.

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