Scarcely a week goes by without Citigroup finding itself in the middle of some financial scandal. As the biggest company in what is now regarded as a very dirty business, it's no surprise that its fingerprints are at the scene of every crime. Nevertheless, the company (along with the rest of Wall Street) continues to exhibit that deer-in-the-headlights look at being exposed and generally acting as if nothing were wrong.
On Monday, Salomon Smith Barney, a Citigroup subsidiary, admitted to Congress that it directed shares of hot initial public offerings to executives of WorldCom, one of its biggest corporate clients. I found this a rather stunning admission, not so much that SSB did this (the dirtiness of the IPO business has been common knowledge for years) as that it fessed up. Citigroup was nice enough to post its response, a letter from Jane C. Sherburne, one of its lawyers, on its website. It is probably no coincidence that Sherburne, with years of scandal-related experience in the counsel office of the Clinton White House, would draw an assignment no one else wanted to touch with long tongs.
The letter itself was a disappointment. Although Citigroup admitted that it allocated shares on a preferential basis to WorldCom executives -- it could hardly avoid it because the House Committee subpoenaed documents proving it -- it strained to place the practice in "context," all the time emphasizing its recognition of "evolving standards" and its "leadership role" in maintaining public confidence in the markets.
Taking the simple expedient of posing as a member of Citigroup's janitorial staff and looting Jane Sherburne's wastebasket, I can provide you with the more enlightening first draft of this letter. (My action will also, no doubt, lead Citigroup to evolve its standards for checking the ID's of its custodial crew and help it maintain its leadership role in providing burn bags outside the offices of all corporate counsel.)
Dear Chairman Oxley and Ranking Member LaFalce:
Enclosed please find documents responsive to the Committee on Financial Services' subpoena to Citigroup dated August 14, 2002. I apologize that this letter has not come to you over the signature of Sanford Weill, Citigroup's Chief Executive Officer. Unfortunately, the response to the subpoena is due and, not only is the office empty but the lights don't seem to be working either.
While we believe that Salomon Smith Barney has always allocated IPO shares in accordance with applicable regulatory standards and industry practice, we also understand that regulatory standards are evolving. As they continue to evolve from "crooked" to "honest," we will continue to take a leadership role in maintaining public confidence in the markets. In fact, we would demonstrate our commitment to underwriting honest initial public offerings if we could just get some IPO business. (If you know of any companies interested in selling securities to the public, we could offer a substantial finders fee. Unfortunately, due to these evolving standards, we can't offer it in the form of preferential allocations of IPO shares. But, as you can see from our board of directors composition -- with a former Treasury secretary, the successor at Alcoa of the current Treasury secretary, and a former President as an "honorary board member" [even we don't know what this means, other than it put Jerry Ford on our payroll]- we know how to take care of helpful members of the government.)
In addition to providing the enclosed spreadsheet detailing the dates, share amounts, companies, and profits received by WorldCom executives from SSB, let me make four points providing a context for this information.
First, the allocations made by the old institutional firm, Salomon Brothers, prior to its acquisition by Travelers in November 1997 with Travelers' retail firm, Smith Barney, differed substantially from those made by the new firm, SSB. I hope you will also remember that the nasty Long-Term Capital Management crisis was also the work of some former Salomon traders. I think they also had a hand in Watergate, but that's just second-hand information.
Second, after November 1997, the allocations given to those WorldCom executives (and the executives of a lot of other companies, but you haven't asked about them yet) went down. Partly, this was the result of Citigroup's current management taking over these operations and cleaning them up. We acknowledge that part of it may have been the result of the dot-com boom creating an ever-longer list of executives to whom we had to provide "favors."
Third, the allocation of IPO shares to executives of companies that provided Citigroup with business replaced the previous, more odious practice of providing those same executives with prostitutes. Until now, there have been no laws regarding IPO allocations. In contrast, prostitution has been illegal and adultery (most of those executives were married) has been considered a sin. If you condemn us for corrupting the IPO process, I hope you will at least commend us for cleaning up the prostitute process. And don't even ask what we have to give these guys nowadays to get business, since we can't give them IPO shares.
Fourth, neither research analysts nor investment bankers are responsible for the allocation of IPO shares to customers. As reflected in the documents we are providing to you today, we have located very few documents that even connect former employee Jack Grubman, both an analyst and investment banker at SSB, to IPO allocations to these investors. And I'm fairly certain none of the documents we shredded in the last sixty days tied Grubman to these allocations.
I hope this provides the proper context for the attached list of IPO allocations to former officers of WorldCom. As new revelations come to the attention of the media and Congress, Citigroup will continue to develop new standards of conduct.
Jane C. Sherburne
P.S. Disregard anything you hear about Citigroup financing a plot to assassinate Argentina's finance minister.