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JUNE 9, 2003
CEOs to Eliot Spitzer: "Give It Back? No Way!" It's tough getting executives to disgorge profits from hot IPOs It's not every day that a company thumbs its nose at New York State Attorney General Eliot Spitzer. But that's what the Walt Disney (DIS ) Co. board did when it rejected a request from a small shareholder that Chairman and CEO Michael D. Eisner give back money he pocketed from buying 30,000 shares in the 1999 initial public offering of Goldman Sachs Group Inc. The board concluded that Eisner got his stock because of his personal financial ties to Goldman, not because of any influence he wielded at Disney. The refusal flies in the face of Spitzer's crusade to get execs to fork over money they made from IPOs funneled to them by their companies' bankers. Spitzer argues the lucrative perks are attempts by the banks to buy future business. He also says IPO profits belong to shareholders since the CEOs got them only because of their jobs. That's why he sued five high-profile telecom execs last September for the return of more than $28 million in IPO profits. That effort bore fruit. On May 13, Philip F. Anschutz, the founder of Qwest Communications (Q ) International Inc., agreed to donate $4.4 million of IPO profits to New York charities. Cases against others, including ex-WorldCom Inc. CEO Bernard J. Ebbers, are pending. Spitzer hopes that boards and shareholders will target offenders. "We can't sue every CEO who received IPO shares," says Eric Dinallo, bureau chief of Spitzer's investor protection unit. So far, few others are taking up the cause. Institutions and companies contend that many CEOs are longtime clients who got IPO allocations because of their personal brokerage accounts rather than their companies' ties. Moreover, they say it's almost impossible to know -- or prove -- that the top brass selected a vendor because of a payoff. Consequently, Spitzer's campaign is foundering. "There's no question the arrangement Spitzer is going after stinks," says Kirk O. Hanson, an ethics professor at Santa Clara University. "But given the varying degrees of involvement, knowledge, conflict, and intent, Spitzer's campaign will have trouble gaining traction." The Securities & Exchange Commission so far hasn't recouped any IPO profits from individuals, though it's looking for evidence of any quid pro quo, says a senior SEC official. It's also working on rules to regulate banks' IPO share allocations. Few institutional investors have jumped into the fray. Two public pension funds in Ohio did write to the CEOs at their 10 largest holdings, including General Electric Co., asking whether top execs had accepted IPO allocations from their investment bankers. In every case, says Herbert L. Dyer, executive director of the State Teachers Retirement System of Ohio, "what we heard back was that they hadn't done it, they don't do it, and that they won't do it." Governance experts say activists may get better results trying to prevent abuses rather than pursuing past misdeeds. "It's rare that we go back and force individuals to disgorge profits," says Hanson. "So it's important to set limits for the future." And even more important to enforce them.  By Linda Himelstein in San Mateo, Calif., with bureau reports Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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