DJ: Heard on the Street: As Lawyers Target Analysts, Now It's Grubman's Turn
(Wall St. Journal Full Text 04/12 02:02:04)
---- By Charles Gasparino
THE ASSAULT ON WALL STREET analysts advanced as the lawyer who won a big
settlement from Merrill Lynch & Co., over the bullish research of its former
star Internet analyst Henry Blodget took aim at an equally high-profile
target: star telecom analyst Jack Grubman.
Attorney Jacob Zamansky, who won the Blodget settlement from Merrill this
past July, filed an arbitration case yesterday against Mr. Grubman, who
helped the Salomon Smith Barney unit of Citigroup Inc. win scores of
telecommunications deals and earn big bucks in the process.
The case, however, says there was also a large downside to Mr. Grubman's
work: Mr. Zamansky's client, George Zicarelli, a 60-year-old videotape
editor for CBS News, filed for bankruptcy protection from creditors after he
lost $455,000 on shares of Global Crossing, a once high-profile telecom
stock, which he bought based on Mr. Grubman's optimistic research. Mr.
Zicarelli is seeking $10 million in damages, which the suit claims is half
of Mr. Grubman's annual salary, though that figure isn't public.
Salomon Smith Barney had no comment. The arbitration case, filed with the
New York Stock Exchange, couldn't come at a worse time for Wall Street
research departments, which have come under scrutiny from federal regulators
and prosecutors over allegations of overly optimistic research calls during
the technology-and-telecom stock bubble.
The Securities and Exchange Commission, the National Association of
Securities Dealers' regulatory arm and the New York State Attorney General's
office are all examining allegations that Wall Street firms regularly hyped
stock recommendations of companies to win investment-banking deals and in
the process misled investors about stocks that later nose-dived.
At the center of the controversy: Mr. Blodget, and his counterpart at
Salomon Smith Barney, Mr. Grubman. Both men made bullish predictions that
put them in an awkward position after the bubble burst for dot-com and
telecom companies, including those they had recommended. Mr. Blodget had no
comment.
Mr. Blodget was one of the first to come under fire for his stock picks when
Mr. Zamansky filed an arbitration claim on behalf of a former Merrill
client. The investor, Debases Kanjilal, contended Mr. Blodget maintained a
"buy" recommendation and a $100 price target on the stock of InfoSpace Inc.,
an Internet company, to support a lucrative financial deal for Merrill.
Mr. Kanjilal said he had a loss of about $500,000 after following Mr.
Blodget's advice. As of 4 p.m., in Nasdaq Stock Market trading, InfoSpace
traded for $1.37 share. Merrill initially vowed it would fight the charges,
but later agreed to settle the case for $400,000.
But the issue never went away. The lawsuit and subsequent revelations about
Mr. Blodget's stock picking sparked the interest of New York State Attorney
General Eliot Spitzer, who launched an investigation into whether Wall
Street research departments, and analysts such as Mr. Blodget, issue
positive reports on companies to win investment-banking deals. His probe's
most damaging revelation: a series of e-mails showing that Mr. Blodget and
other Merrill analysts often harbored doubts about companies they were
publicly touting. Merrill Lynch has no comment, and previously said that the
e-mails were taken out of context.
As a result, Mr. Spitzer recently obtained a court order forcing Merrill to
make changes in its research department, and he says he is considering
filing criminal charges against firms or individual analysts. Yesterday,
Merrill won a delay in the implementation of that order until April 19.
Now it is Mr. Grubman's turn. People close to the state attorney general's
inquiry say soon it will begin to focus on Mr. Grubman's stock calls, and
whether those calls were framed to help his firm win investment-banking
deals, according to people close to the inquiry.
This past week the attorney general's office issued a subpoena asking for
documents and e-mails including those related to Mr. Grubman's work,
according to people close to the inquiry. These people say, Salomen Smith
Barney is complying with the subpoena.
Through the years, 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. Long one of Wall Street's most
respected analysts, he also gained the image of a swashbuckling deal maker
who can sometimes make or break a telecom merger or stock offering.
His work helped put Salomon Smith Barney at the top of the charts in
underwriting stock and bond deals of telecom companies. But his stature
began to decline as some of his picks faltered in the telecom-stock
meltdown. One of Mr. Grubman worst calls: Global Crossing, the fiber-optic
company, which is the focus of the arbitration suit. Global Crossing sought
bankruptcy protection from creditors and is facing a regulatory and criminal
probe of its accounting practices.
Salomon jointly led the Global Crossing initial public offering of stock
with Merrill Lynch in 1998, and Mr. Grubman continued to support Global
Crossing, even as other analysts began to cool on it; he recommended the
stock as one of his three "top picks" in June 2001. At the time, Global
Crossing's share price was more than 80% off its high of $64. Since then,
the stock has dropped even more sharply and was valued at 30 cents just
before the concern filed for bankruptcy protection.
But Global Crossing wasn't his only mistake. He was bullish on the
competitive local-carrier sector, pushing Salomon banking-client companies
such as XO Communications, McLeod USA and Winstar Communications. Since he
recommended the stocks in spring 2001, Winstar and McLeod have sought
bankruptcy-court protection while XO plans to restructure its balance sheet.
His picks have hurt him inside Salomon as well. In recent months, some
senior sales people at the firm launched an effort to have Salomon Smith
Barney management recruit another telecom analyst, Susan Kalla, now a senior
analyst at the firm Friedman, Billings Ramsey & Co., according to people
familiar with the effort. The focus of concern: Many sales people felt they
were burned by Mr. Grubman's stock picks, when they recommended telecom
shares to clients who lost big in the meltdown.
Ms. Kalla, meanwhile, has earned kudos for being among the first researchers
to urge investors to sell telecom shares last year. While saying it still
supports Mr. Grubman, Smith Barney declined to elaborate; Ms. Kalla declined
to comment.
In the arbitration claim, filed against Salomon Smith Barney, Mr. Grubman,
and a company broker, Daniel Donato, Mr. Zicarelli says it was Mr. Grubman's
positive research that caused him to buy shares of Global Crossing, and
continue to buy shares even as the stock fell in value. According to the
claim, Mr. Zicarelli said he began buying shares in 1999, when the stock
traded around $50.
He said his broker, Mr. Donato, urged him to buy shares throughout 2000 --
even as company insiders were selling shares -- by sending him research
reports prepared by Mr. Grubman, which touted his $70 price target even as
the stock traded around $16. The report urged investors to be "aggressive
buyers of the stock," the arbitration says.
Mr. Zicarelli said he followed that advice, but last year, as shares of
Global Crossing began a sharp slide he was forced to liquidate his account
and take steep losses. In January, Global Crossing filed for bankruptcy
protection and shares of the company's stock trade for pennies on the
dollar.
Mr. Grubman, and Mr. Donato didn't return a telephone calls for comment. But
Mr. Zamansky, the lawyer for Mr. Zicarelli vowed to conduct his own
investigation against Salomon Smith Barney and Mr. Grubman. He said he will
be seeking company e-mails and other documents, which he believes will show
that Mr. Grubman misled investors.
"Grubman and Smith Barney must be held accountable for misleading investors
with thoroughly conflicted stock research. They were nothing but
cheerleaders for the companies his investment banking department took
public," Mr. Zamansky said.
04/12/2002 02:0 |
