Spinning in a Hot IPO: A Matter of Business Ethics

Abstract

Spinning is a story that has been around for a while, although there has been considerably more interest in the practice of spinning following recent revelations in the financial press that well-known investment banking firms, such as Credit Suisse First Boston and Salomon Smith Barney, engaged in questionable spinning activity in the late 1990's. One very high profile example, which is the subject of ongoing Congressional and regulatory scrutiny, concerns the spinning practices of Salomon Smith Barney during the hot IPO market of the late 1990s. The WALL STREET JOURNAL has recently reported that in the late 1990s Salomon allocated shares of various hot IPO's in which it served as lead underwriter to the personal trading account of Bernard Ebbers, who was then serving as CEO of WorldCom. This Article analyzes the responsibility and accountability of the underwriter (Salomon) and the executive (Mr. Ebbers) for their involvement in this reported spinning activity.

The Article proceeds along two distinct but related lines of inquiry. The first, which has tended to dominate public debate to date, relates to the culpability of those investment banking firms who made the hot IPO allocations. The second, and in many ways more interesting dimension to this story, is the analysis of the culpability of the corporate executive who received the hot IPO allocation. Although the principal focus of my Article is the conduct of the corporate executive, an analysis of the underwriter's potential liability for its spinning activity provides the framework that is necessary to understand the responsibility of the corporate CEO who in turn accepts the hot IPO allocation from the underwriter.

The story of spinning offers a fascinating study of the excesses of managerial conduct that grew out of the bull market of the 1990's. In the end, I conclude that the lessons to be learned from the story of spinning serve as a poignant and powerful reminder of the important and influential role that the law of fiduciary duty continues to play in shaping and monitoring standard of fair and ethical conduct that investors can reasonably expect of modern corporate managers. Just as importantly, by framing the doctrine of corporate opportunity to include the CEO's allocation of hot IPO shares from the company's investment banker, the law of fiduciary duty serves the important public policy goal of holding these CEOs accountable for the responsible exercise of power and influence that inevitably comes with the position of CEO of a public company in today's business environment.

Keywords: IPO, law of fiduciary duty, fair and ethical conduct