THE BRIBE EFFECT.(Salomon Smith Barney)(Brief Article)

Salomon Smith Barney, like so many firms on Wall Street, seeks to please its clients. On June 24, 1997, when it was still Salomon Brothers, it offered one of those clients, Bernie Ebbers, the C.E.O. of WorldCom, the opportunity to buy more than two hundred thousand shares in the initial public offering of a telecommunications company called Qwest. At the time, the I.P.O. market was lucrative, and a bet on Qwest was a virtual lock, so Ebbers bought in. Three days later, Qwest's stock price was up twenty-seven per cent, and Ebbers began selling. In the end, he cleared almost two million dollars. Clients appreciate this sort of thing, especially when it happens more than once. Between 1996 and 2001, Salomon helped Ebbers earn eleven million dollars flipping I.P.O. shares.

As it happened, while Salomon was making Ebbers richer, he was sending a lot of business its way. Between 1997 and 2001, according to Thomson Financial, WorldCom paid Salomon a hundred and forty million dollars in fees for its underwriting of the company's debt and equity, and another seventy-six million in fees for its advice on mergers and acquisitions.

Salomon insists that the transactions had nothing to do with each other--that there was quid and quo, but nary a pro in between. You'd have a hard time finding anyone who believes this. It sure looks as though Wall Street investment banks, in the hope of winning future business, routinely doled out cheap I.P.O. shares to corporate executives, who then sold them for quick, hefty profits--a process known as "spinning." That practice has occasioned a predictable chorus of outrage, from editorial writers and politicians alike. Representative Michael Oxley, the chairman of the House Financial Services Committee--which is currently investigating I.P.O. allocations at Salomon, Goldman Sachs, and Credit Suisse First Boston--calls these gifts to executives "another example of how insiders were able to game the system at the expense of the average investor." Massachusetts Secretary of State William Galvin put it more bluntly: "The problem with I.P.O. spinning is that it's bribery."

But what of it? The lavishing of gifts and favors on prospective or valued customers is generally considered smart salesmanship. Potential advertisers and clients get free Knicks tickets. Maitre d's give regulars and bigwigs the best tables. Las Vegas casinos comp high rollers. Movie studios take journalists on junkets. For that matter, most civilians get the Ebbers treatment every day, barraged as they are with offers of free stuff in exchange for their patronage. Buy a Chevy Malibu and get three thousand dollars in cash up front. Join Columbia House and get twelve free CDs. In all these cases, companies are giving away "something that serves to induce or influence," which is ...