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New York Sues 5 Telecom Executives


In an unprecedented legal action, the New York State Attorney General sued five telecommunication executives, seeking repayment of funds they allegedly garnered through fraudulent practices. The defendants in the lawsuit include former WorldCom chief executive Bernard Ebbers, along with four other high-ranking executives at companies such as Qwest Communications and Metromedia Fiber. The men are accused of collecting millions of dollars in profits from initial public offerings of stock, or IPOs, without disclosing potential conflicts of interest.

According to New York Attorney General Eliot Spitzer, Mr. Ebbers allegedly made more than $11 million from several dozen IPOs in the late 1990s. The other four men are charged with netting $15 million, collectively, in other allegedly fraudulent deals.

Mr. Spitzer says he intends to recover these gains, which he labels "unjust enrichment". "Today's lawsuit is designed seek disgorgement, restitution, of these funds from the five individuals who were named," he says. "These individuals are being told very simply, "You cannot benefitt individually from this structure. If there were benefits to be given at all, return them to the company. Return them to the shareholder."

If the suit is successful, Mr. Spitzer says the court will determine how best to restore the funds to the company and its shareholders.

The suit also implicates the investment banking firm Solomon Smith Barney for providing the five defendants with valuable investment information, from which the defendants were able to reap enormous profits. According to the complaint, the five executives steered their underwriting business to Solomon Smith Barney and the investment firm would, in return, give these companies' stock high-ratings, regardless of the true value of those stocks.

Mr. Spitzer says the most aggrieved victims of this scheme were individual investors on whose behalf, he says, the suit is being filed. "The loser was the small shareholder. Why is that? The small shareholder believed the analysis that was being disseminated on a stock, not knowing that stock was not worth his or her money. That stock went down and down and down, and never, during the course of that decline, did the analyst say, "Sell that stock".

Last week, Salomon agreed to pay a five-million dollar fine to settle charges that its top analyst, Jack Grubman, issued misleading research reports about a telecommunications company that later filed for bankruptcy.

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