DJ: Spitzer Staff Gathers Salomon E-Mails Criticizing Grubman ---- By Charles
(Wall St. Journal Full Text 07/16 02:02:29)
Gasparino
SENIOR INVESTIGATORS FOR New York State Attorney General Eliot Spitzer have
gathered internal e-mails from executives at Salomon Smith Barney
criticizing telecommunications-stock analyst Jack Grubman that could form
the basis of a case against the star researcher or the securities firm
itself, according to people close to the matter.
The e-mails come as Mr. Spitzer has given his staff an early August deadline
to provide him with evidence it has collected so he can make a final
decision on any case against Mr. Grubman and the firm, a unit of
financial-services giant Citigroup Inc., these people say. Though no final
decision has been made inside the attorney general's office on the matter,
some senior officials in his office recently came to the conclusion that
they now have enough evidence gathered against Mr. Grubman to bring a case
against him, these people add.
Officials from Mr. Spitzer's office declined to comment. Salomon Smith
Barney, in response to questions on the Spitzer inquiry, said: "It's
inapproriate for us to comment on the course of Mr. Spitzer's inquiry,
except to say that we're cooperating fully." Mr. Grubman didn't return a
call for comment and the spokeswoman for the firm said he had no comment.
At issue for Mr. Grubman is his dual role helping Salomon Smith Barney win
lucrative securities business from the nation's top telecom outfits while he
was recommending investors snap up shares of these companies in his role as
the firm's top-rated telecom analyst. Investigators from Mr. Spitzer's
office are examining the possibility Mr. Grubman could have violated New
York state law by failing to disclose his dual role to investors, many of
whom lost big buying shares of technology companies thinking they were
getting unbiased information from the telecom guru.
To be sure, many questions remain unanswered. It's unclear whether Mr.
Spitzer would pursue potential criminal or civil charges against Mr. Grubman
for any violations of New York state securities law. It is also unclear if
other senior Smith Barney executives, or the firm itself, will face charges
from Mr. Spitzer's office.
The New York attorney general isn't alone in examining Mr. Grubman's
activities. The regulatory arm of the National Association of Securities
Dealers also is investigating whether there were any potential undisclosed
conflicts involving Mr. Grubman's research that could have violated NASD
rules. An NASD spokesman declined to comment.
But the new evidence gathered by Mr. Spitzer's office is the clearest
indication yet of the way in which he is pursuing Mr. Grubman. Mr. Spitzer
used e-mails with great success to force Merrill Lynch & Co. to overhaul its
research practices. Merrill, the nation's largest securities firm, agreed in
May to pay a $100 million fine to settle charges that it misled investors by
providing overly optimistic research on companies that paid the firm huge
investment banking fees. In the Merrill case, Mr. Spitzer released e-mails
from Merrill analysts, including former star Internet-stock researcher Henry
Blodget, showing these executives privately criticized stocks that received
higher public ratings.
During the 1990s, Mr. Grubman made no bones about playing a dual role at
Salomon Smith Barney, providing research to investors, but also helping the
firm win investment-banking assignments. But the case against Mr. Grubman
wouldn't necessarily hinge on the star analysts' own words; investigators
haven't found e-mails from Mr. Grubman that directly contradict his official
opinions in the way they did among the Merrill analysts, people close to the
inquiry say.
Instead, people close to the inquiry say Mr. Spitzer has uncovered e-mails
from Mr. Grubman's colleagues, many of them critical of his work, which show
his close connections to the investment-banking process. Some of the
e-mails, for instance, criticized Mr. Grubman for his dual role as both an
analyst and an investment banker helping the firm win deals. Other e-mails
show that investment bankers at the firm had sought his help to win banking
assignments, these people say. Still other e-mails from Mr. Grubman himself
talk about his close relationship with the companies that he covered, and
taken together could make the basis for a case, these people added.
"The smoking guns in the analyst cases will likely be in the form of e-mails
because people converse more candidly in e-mails," said Jacob Zamansky, a
New York-based securities lawyer who has filed an arbitration case against
Salomon Smith Barney, Mr. Grubman and a broker, over allegations that the
analyst misled an investor into buying shares of Global Crossing Ltd. and
losing his life savings after the stock was crushed.
Incriminating electronic messages don't "have to come from Grubman himself,"
Mr. Zamansky said. "Evidence of conflicts of interest could come from others
inside the company who could show that the wall separating banking and
research was breached."
The New York attorney general's office is gathering other evidence in the
probe of Mr. Grubman's activities, including his compensation contract and
is looking for documents that might show that he often was paid based on how
much investment banking deals he helped to generate, not how well he served
investors through his stock picks.
Last week, quizzed by members of Congress who are investigating one of Mr.
Grubman's former top-investment picks, WorldCom Inc., Mr. Grubman estimated
that Salomon had received $80 million in investment-banking fees from 1998
to 2001 from the telecom company that recently announced a massive earnings
misstatement.
During his testimony, Mr. Grubman said there was "no direct tie" between
those fees and his own compensation and that he didn't receive any
"percentage fee by fee" for Salomon deals advising WorldCom. But Mr. Grubman
did say his work helping the firm obtain banking deals contributed to his
pay, which averaged about $20 million a year during the past four years --
among the highest of any analyst in the securities business.
"My compensation is a function of many factors," he said during the
hearings. "One of those factors is banking revenues to the firm."
One deal he played a big hand in helping Salomon win involved his upgrade of
AT&T Corp. stock in late 1999, according to people close to the matter. Mr.
Grubman upgraded AT&T to a "buy" rating from his long-held "neutral."
His reason: a reassessment of AT&T's plans to use cable-TV lines to offer
local phone service, high-speed data services and other "broadband" services
to customers nationwide, Mr. Grubman said then.
Others on Wall Street suggested that he had a different rationale. At the
time, AT&T was gearing up for a blockbuster public offering of stock -- it
was considering selling to investors billions of dollars of shares tied to
its wireless business -- and Salomon was seeking a lead underwriting role.
People familiar with the matter say Sanford I. Weill, then co-chairman of
Salomon parent Citigroup and an AT&T board member, nudged Mr. Grubman to
give AT&T a fresh hearing as the firm sought the underwriting business.
AT&T eventually selected Salomon as one of its top underwriters for the
deal, helping the firm win big underwriting fees. At the time, Mr. Grubman
said: "Anyone who knows me knows that I call them as I see them. No one
tells me what to do."
A Salomon Smith Barney spokeswoman referred to Mr. Grubman's previous
comment on the matter. Mr. Weill, who now is Citigroup's sole CEO, has no
comment, a Citigroup spokeswoman said.
07/16/2002 02:00 |
