The Broker Inside the IPO Scandal
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“You know I’m putting a bullet in my head, telling you this,” David Chacon says. “I’ll never work in the industry ever again.”
This is the Salomon Smith Barney broker who, when his story hits the next day’s papers, will become the latest player in the IPO scandals. He’s an ambitious young man, good at brokering stocks and brokering relationships.
On a steaming July day at his lawyer’s office, Chacon has barely slept. You’d never know it. He talks fast, uses his hands; his face betrays little emotion. He is intense and focused, exuding the seriousness that you’d expect from the power broker that he wanted to be. He concentrates on your words when listening; he doesn’t mince his own, as he recounts the startling allegations from his suit against Smith Barney—how favored customers, including former WorldCom CEO Bernard Ebbers, were given risk-free allocations of IPOs as a reward for giving Solly banking business.
Chacon, 31, is hardly the typical whistle-blower. And he’s not looking for sympathy: He knew what he was looking for—money, power and the thrill of being on the inside, playing with the big guys. Born to a poor family in Los Angeles, Chacon worked his way up, becoming a high-powered broker in one of Smith Barney’s Los Angeles offices, where he worked from October 1996 to July 2000. Eventually, he was fired, he says because he raised concerns over allocations of hot IPOs to high-ranking telecom execs—“The Telecom Mafia,” as he puts it.
These CEOs, he says, people like Ebbers or Joseph Nacchio, former head of Qwest, were the type of people he wanted to ingratiate himself with. After being fired in July 2000, he filed a lawsuit against Smith Barney, claiming discrimination but including other, far-ranging allegations.
His suit alleges that the firm directed shares of hot IPOs to corporate executives, sometimes after the shares had started trading, and allowed them to sell those shares at a massive profit while simultaneously instructing other brokers not to flip. He alleges in the suit—first filed in 2000 in California but amended since—that this was done to enrich Smith Barney’s brokers, bankers and analysts, including telecom analyst Jack Grubman, by directing business back in their direction. “It’s wrong when there’s quid pro quo,” he says.
The firm denies his charges.
A Power Broker, Not a Regular Broker
Chacon isn’t one of these brokers-with-a-heart-of-gold, a regular guy who was caught up in a game he didn’t want to play. He wanted to master the game. “I wanted to be a player,” he says. “Most retail brokers don’t understand the difference between regular brokers and power brokers.” The first time he saw two of his Smith Barney superiors at the L.A. office, he saw the difference. “I wanted to be a power broker,” he recalls.
In staccato bursts, he describes his early brazenness, pointedly telling about how he got his foot in the door at Smith Barney in 1995. After eight interviews, a personnel head told the 25-year-old that he didn’t have a job. Chacon’s response: “I’ll make you a bet. I’ll work free for six months, and if I’m not No. 1 nationally among the brokers in my class, you can fire me.”
Six months later, he was still there. Cold calling wasn’t cutting it—“any dumb monkey can do this,” he told himself. What excited him was the thrill of relationship brokering. Chacon says he wanted to get into the mind of billionaires—learn their wisdom, “steal their strengths.” It wasn’t about overnight riches, he says, like those who muse about winning the lottery. His father taught him, he says, that he couldn’t get something for nothing. The process, the moving parts, that was the thing.
“I’m not sure why. I wanted money, but it was a hero complex, or an intellectual curiosity, or something, I’m not sure,” he says. “I think it was mostly my curiosity on how that all worked.”
The guy who knew all that was Rick Olsen, who became Chacon’s boss. Olsen came from Salomon and Chacon met him when the firm merged with Smith Barney. Olsen was “Jack’s broker,” says Chacon, referring to star analyst Grubman. Olsen, says Chacon, handled big accounts, accounts belonging to Ebbers of WorldCom and other telecom big hitters who were friends of Grubman. Chacon managed to ingratiate himself with his boss, ultimately becoming a partner with Olsen, whose name carried weight.
Using Olsen’s name gave him entrée to other rich clients and Chacon fattened his book, although he had to split proceeds of his new clients 60-40 with Olsen. In a few years, Chacon says he went from making $120,000 to nearly $750,000 and was promoted to senior vice president in less than three years.
No matter—he was biding time for the day when he could break free, and be his own man, and work with billionaires of his own. This was the prize he wanted, the “diamond in a blue Tiffany box wrapped with a silk ribbon,” Chacon called it. “They don’t care about 100,000 shares of IBM. They want to be on a board of directors. Say you’ve got CEO A and CEO B—you step in, between those egos. So you’re brokering stocks and relationships.”
The Los Angeles office was a perfect place for a power broker. During the late 1990s, when dozens of telecom companies were going public, that office was given major allocations of IPO shares, he says. Part of the drill, Chacon says, was to maintain smooth relations between members of the “Telecom Mafia” and the firm, which is where the IPOs came in. The presumption—by Chacon and by congressional investigators—is that clients like Ebbers got these goodies as an inducement to throw more banking business to Smith Barney. Grubman, in testimony to the House Financial Services Committee on July 10, said he didn’t know whether IPOs were doled out in such a fashion. “I don’t recall. I’m not saying yes; I’m not saying no,” he told Congress.
“He’s a liar,” Chacon asserts. Chacon’s attorney, Jeffrey Liddle of Liddle & Robinson, says he expects to hear from Congress, although there was no word on that at press time; calls to Congressman Paul Kanjorski (D, Pa.), a member of the House financial services committee, were not returned.
Get Paid—Fat
Chacon certainly wasn’t what Ray Liotta’s character in GoodFellas called a “regular schnook” anymore. He says he knew the difference between how Olsen and ordinary brokers were handled when new issues came in. “They told all the other retail brokers, who they thought of as monkeys, ‘Hey, we really need everyone on this deal.’ You were punished if you sold” shares early, he says. “I remember the syndicate meetings,” Chacon says. “But I was becoming exempt, more exempt.” His suit asserts that brokers who sold shares early were shut out of future deals, which didn’t hold for the telecom magnates.
Liddle believes that, if proven true, it shows a pattern to manipulate shares to enrich a few who could direct hefty business to Smith Barney. Liddle says: “This all gets back to the 'b' word—were these bribes? That's the bottom line.”
Chacon knew the value of IPO shares in generating business. In 1999, he was put in charge of the directed shares, or “family and friends” plan for KPNQwest. This coup allowed him to get accounts with the likes of Netscape founder Jim Clark and Jim Jermoluk, former head of Excite@Home. He says he remembers Clark, at a party prior to the offering, telling him he wanted “a million shares” of the new stock at IPO.
A million shares is a ridiculous amount, but that’s not the point. Clark didn’t expect to get them, Chacon says. “The point is, he wants to see how big my balls are.”
Ultimately, Chacon says in this deal and others, shares were misallocated to Olsen’s clients, and other qualified investors were frozen out. That’s what upsets Chacon. Currying favor with and helping the wealthy get more money doesn’t bother him; the goal within the firm was to “get paid—fat.”
“I have no problem with getting an account with, for example, Bill Gates and helping him get shares in a company where there’s no conflict of interest,” he says. The freezing out of other qualified investors is a problem, he says.
In addition to going public with details of his suit in late July, Chacon is waging his campaign on a Web site, wallstreetii.com. He says he posted it right after Grubman’s testimony. Chacon goes into—replete with thunderstorm sound effects and The Godfather theme—the way he sees the situation. It includes his allegation that Ebbers received hundreds of thousands of shares and quickly sold them for a huge profit—with the idea that Ebbers would return the favor through other business.
Chacon says he drew the line at the kind of deal he alleges that Smith Barney made for folks like Ebbers—a risk-free investment (because the clients were given shares after trading already started, he says), an instant flip and a huge windfall, while smaller investors were left holding the bag. While that’s a clear conflict, to Chacon, it isn’t proven. The SEC investigated IPO allocations to top execs early in the last decade and took no action. However, he says it goes further; it’s in exchange for promised banking business.
The Thin Red Line
“I walked in with blinders on,” he says. “I knew there’d be bad. I didn’t think there’d be this much concentration of bad.” Eventually, he says he started complaining. He says he spoke with management on several levels, offering as proof a copy of a memo addressed to Smith Barney vice president Jay Mandelbaum on June 25, 2000, telling of “improper allocation” of IPOs. He says he was told, “This is how the game is played. Why do you think you’re getting this money? You’re breaking the law.”
Smith Barney told The New York Times and The Wall Street Journal that Chacon did not speak to higher-ups and that Mandelbaum never received such a memo. Chacon’s attorney, Liddle, disputes that, saying there are memos from his prior attorney to attorneys at Smith Barney, which did not return a call seeking comment. Whatever happened, Chacon was fired in July of 2000, for unauthorized trading, according to Smith Barney. However, his U-4 form is clean, according to the NASD disclosure database. Chacon showed Registered Rep. a sworn declaration from one of his clients, Leopold Cantofio, who stated that a branch manager, in a phone conversation, attempted to push him to say that Chacon had engaged in unauthorized trading of his account—which Cantofio says is not true, adding that he moved his accounts with Chacon when the broker moved to Credit Suisse First Boston in July 2000.
Cantofio’s wife, Norma, confirmed this. “He’s always been a good broker; he never did anything wrong to us,” she says. “He’s still our broker—that ought to tell you something.” —David A. Gaffen
