The lawyer for former Salomon Smith Barney financial consultants Phil Spartis and Amy Elias intends to argue his clients offered opportunities for diversification at a Houston arbitration hearing scheduled to start Monday.
Registered Rep. listened to taped conversation which, at various points between June 1999 and June 2000, indicate that Elias discussed diversification with WorldCom employee Robert Goss, and that she also set up phone meetings with financial and estate planners. (Spartis does not show up on any of these phone calls.)
At times, Elias also mentions the positive outlook of Jack Grubman—the analyst Spartis and Elias are now suing—as a reason for optimism. The tapes detail Goss’s ultimate decision in May 2000 to exercise his options and go long with a hefty margin balance, which ultimately caused numerous margin calls beginning in late 2000.
Robert and his wife Melanie Goss, who live in Plano, Texas, are seeking $600,000 in damages, having filed against Smith Barney, Spartis and Elias.
The Gosses’ attorney, John C. Allen of Houston, contends in his statement of claim that Elias and Spartis, in a March 2000 meeting (which was not recorded) encouraged the two to borrow on margin to exercise their options; it claims Spartis said the two would be "foolish" not to proceed. Allen was unavailable for comment at press time; Smith Barney declined comment.
Spartis was head of the corporate client group that supervised WorldCom’s stock option plan. He, Elias and several other brokers at an Atlanta branch had numerous complaints lodged against them in 2000 from several dozen WorldCom shareholder-employees.
Ultimately, Spartis and Elias were fired in a dispute with Smith Barney. The two claim the firm rushed to settle claims against them when they were prepared to defend themselves. They, through attorney Jeffrey Liddle of Liddle & Robinson, sued Smith Barney in March and filed a claim against analyst Grubman. Liddle says Smith Barney has numerous copies of tapes that will, he believes ultimately exonerate Spartis and Elias.
Goss’s initial call to Elias in June 1999 reveals him to be concerned about the whole procedure, saying, "I’m not a financial wiz." Elias responded by involving Iris Turner, a certified financial planner then working with Robinson Humphrey, in the discussions. During an Aug. 16, 1999, phone call with Elias and the Gosses, Turner advocates exercising and covering—a middle ground that would have covered the tax liability and cost of buying the stock, and allowed Goss to diversify.
Elias then explains in a measured tone the difference in the various options exercise procedures. She adds that of the exercise-and-hold option was popular at the time because WorldCom’s stock was dropping, making a potential tax savings bigger over the long-term. "We’ve been pretty busy on this end, ‘cause a lot of people have been doing the exercise and hold," she says.
Near the end of that same call, Elias (after Turner hangs up) again discusses Goss’s then-preferred strategy of exercising to cover, as well as diversifying, including the possibility of an individually managed account.
A copy of Robinson Humphrey’s financial planning packet sent to the clients includes information about exercising options, along with a packet describing the risks of holding concentrated positions and introduces a number of different hedging strategies, although on the phone calls, hedging isn’t discussed.
One thing that isn’t mentioned by any party—including Goss—in any of the recorded calls is the possibility that WorldCom’s stock price might actually fall below Goss’s cost basis. His numerous options were valued between $10 and $25 a share. The packet says an earlier exercise "might be appropriate to begin the holding period for long-term capital gains treatment."
Sometime between August 1999 and May 2000, Goss changed his mind, deciding to exercise and hold, taking on a big margin balance. The attorney’s claim says it was due to the urging of the brokers in March.
"I’ve been thinking about exercise and hold…and with the stock down kind of low, I think it’s, you know, it might be a good time to do that, because, you know we won’t be hit so hard with a, estimated withholding and estimated problems and so forth," he says to Elias on May 15.
Later in the call, Elias says: "You’re not looking at using margin to cover the cost of the options and the taxes."
"Yeah, I mean, I would, I couldn’t do…anything out of pocket," Goss responds. Ultimately, 23,000 shares were exercised that month. By June, Elias and Goss were commiserating, hoping the stock price would rise. They discuss Goss’s account, which at that time had $726,000 in WorldCom stock and a $387,000 outstanding margin balance.
By late October, the situation had grown more dire—margin calls had hit the account, and Elias, in a message, says: "This is not a panic call…obviously it was no fun being forced to sell and I wanted to come up with a plan with you so we can be in a position where, you know, that doesn’t happen again."
Three months later, the complaint was filed.