Smith Barney Investigated By NYSE, Sources Say

Smith Barney Investigated By NYSE, Sources Say

The New York Stock Exchange is investigating the way in which brokers at Salomon Smith Barney handled accounts of WorldCom employees who held stock options, say two attorneys who are familiar with the investigation.

The news comes after the filing of a suit by two former brokers in its Atlanta office, Phil Spartis and Amy Elias, who were fired after Smith Barney received more than two dozen complaints, amounting to more than $35 million, from current and former WorldCom employees who held accounts at Smith Barney. Registered Rep. broke the story in its March issue.

Culver Halliday, attorney at Stoll Keenon & Park in Louisville, Ky., who has a pending claim against Smith Barney, says he has been in contact with attorneys with the NYSE’s enforcement division, including Aida Vernon, trial counsel for the NYSE. The investigation, according to the attorneys, centers on the advice given to the WorldCom employee-shareholders from the brokers who handled the stock option exercise plan. Vernon referred calls to a spokesman for the NYSE, who said they would not comment on the existence of any particular investigation.

The two brokers were responsible for the exercise of stock options for WorldCom employees. They believe they were terminated unjustly, and in addition to filing suit against their old firm, have also named the firm’s telecommunications analyst, Jack Grubman, as a party to the suit. They say his excessive bullishness contributed to the environment that led to WorldCom employees holding concentrated and margined positions in the stock.

The WorldCom claimants say they were encouraged to hold concentrated positions in WorldCom stock, using margin, in order for Smith Barney to gather more assets for the firm. Many say they lost their entire positions in WorldCom due to margin loans as WorldCom’s stock plummeted over the last two years. WorldCom is currently under investigation for other matters by the SEC.

Documents obtained by Registered Rep. show Smith Barney’s stock exercise analysis of one WorldCom individual’s stock option plan was clearly pointed towards exercising stock options and holding onto them, ultimately a much more risky proposition than exercising and selling. This was a common strategy employed by many who garnered wealth through stock options in the 1990s, the reason being to save taxes on future gains. What, ultimately, was involved was the use of margin loans in order to support these transactions. An increasing number of people, feeling aggrieved, have sought legal action after losing money: the number of arbitration cases involving stock options was 419 in 2001, compared with between 200 and 300 for each of the previous three years, according to the NASD.

"For Spartis to pretend these people got the WorldCom (research) reports off the WorldCom website but ‘We were trying to talk them into diversifying’ is a bald-faced lie," says Seth Lipner, of Deutsch & Lipner in Garden City, N.Y. "They were sending reports to clients the day they came out."

Lipner says he has been retained by six current or former WorldCom employees in the matter, and is working with others. He says he’s been providing documentation to the NYSE since August. "I’m optimistic that they are going to hammer these guys," Lipner says.

The firm has only commented that the claims by WorldCom employees are "without merit" and rely on hindsight. Similarly, Smith Barney says Spartis’ and Elias’ claims are also without merit, and that the firm stands by its research. Smith Barney’s outside counsel, Ben Rogers of Rogers & Hardin, declined comment.

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