It took a congressional subpoena and weeks of negative headlines, but Citigroup ( C) finally has admitted doling out thousands of shares of hot initial public offerings to executives at WorldCom.

But it's not so much the revelation about the IPO wheeling-and-dealing that comes as a shock. What's most surprising is that it took Citigroup nearly two months to come clean on an issue that has dogged other Wall Street investment banks and that many had long suspected of being true at Citigroup's own Salomon Smith Barney division.

"It's nothing new," says David Menlow, president of IPO Financial Network, a new stock offering research service. "If there were to be an investigation it would involve every single firm on Wall Street."

Dog Bites Man

An even bigger shock would have been if Citigroup -- after all these weeks of hemming-and-hawing -- came back and told the House Financial Services Committee that it hadn't allocated any IPO shares to WorldCom executives. The House panel first raised the issue July 8, during a hearing into the long-distance carrier's collapse and the role Citigroup's Salmon Smith Barney division played in touting the ailing telecom's stock.

In fact, the committee's senior Democrat, Paul E. Kanjorski of Pennsylvania, called Tuesday for a broader probe, saying that in light of Salomon's revelations, the panel "has all the more reason to investigate whether other major investment banks have been doing the same for executives or board members of their major clients."

In a letter delivered late Monday to the House committee, Citigroup revealed that since 1997 the average IPO allocation to former WorldCom CEO Bernard Ebbers and former CFO Scott Sullivan totaled 6,409 shares. But before then, the nation's largest financial services company said it wasn't uncommon for WorldCom executives and others to get as much as 101,500 shares in some hot IPOs.

Citigroup points out that those much larger allocations took place before its merger with Salomon Brothers, which at the time was one of Wall Street's biggest bond-trading firms.

But the sheer size of those IPO allocations, which Citigroup says may have generated an average first-day trading gain of nearly $600,000 for each of those executives, is sure to spark additional questions about the stated, or hidden, purpose of such seeming corporate largesse.

Immorally Relative

While it's Citigroup that's clearly on the hot seat now, some say its behavior is no worse than that of other Wall Street firms. That's because it was common practice during the bull market for fee-hungry investment bankers to curry favor with corporate executives by offering them shares in hot IPOs -- a practice known on the Street as "spinning."

Jay Ritter, a University of Florida finance professor who has written extensively about IPOs and the stock market, says a broader congressional inquiry may be needed to "shed light on the whole issue." He contends that investment banks helped fuel the big first-day trading spikes in the prices of IPOs in order to make the shares they were doling out to corporate executives an even more valuable and lucrative commodity.

A recent article co-authored by Ritter and a business professor from Notre Dame likens the IPO allocations made by investment banks to "paying bribes to decision makers."

In fact, the most vocal critics of spinning say it's nothing more than a quid pro quo to a corporate executive, as a reward for directing investment banking deals to a particular Wall Street firm.

Indeed, the controversy over whether spinning is something illegal or just tawdry has been going on for years. The issue first came to light in a 1997 article in The Wall Street Journal that focused on the practice taking place at a number of investment banks, including the now-defunct Robertson Stephens and Morgan Stanley ( MWD).

The story sparked an investigation by the Securities and Exchange Commission. It also led to a related inquiry by the Justice Department into Wall Street's method of allocating IPO shares to money-management firms and mutual funds.

The SEC investigation petered out and ended with a whimper, in part because regulators weren't sure whether the practice amounted to bribery. But the Justice Department probe resulted in Credit Suisse First Boston ultimately paying a $100 million fine to settle charges that it had demanded inflated commissions from money managers who were seeking to buy shares in some hot technology IPOs.

Yesterday's Papers

Federal prosecutors are said to still be looking into whether other Wall Street firms engaged in a similar scheme to inflate commissions on IPOs. The issue of spinning, meanwhile, was all but forgotten.

However, the issue gained new currency this summer when David Chacon, a former Salomon Smith Barney broker, filed an amended complaint in a year-old lawsuit, charging that he had been fired for raising questions about Salomon's IPO practices. The amended complaint contained detailed allegations about Salomon doling out huge blocks of shares in several hot IPOs to a number of WorldCom executives and to executives at other telecommunication firms. All the firms mentioned in the complaint are Salomon investment banking clients.

Jeffrey Liddle, Chacon's lawyer, says if it weren't for the amended lawsuit, which originally started out as a claim of racial discrimination in the workplace, the House panel probably never would have begun looking into the spinning issue.

The lawsuit also may have prompted the SEC and the National Association of Securities Dealers to launch new investigations into the practice.

And just last month, the regulatory arm of the NASD proposed a rule that would severely limit the practice of spinning. The new rule comes, however, nearly five years after spinning first made headlines and at a time that the market for IPOs is as cold as ice.

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