NYTimes.com
April 25, 2002
Wall Street Inquiry Expanded, With a Subpoena to Salomon
By GRETCHEN MORGENSON
s part of an investigation into conflicts of interest among Wall Street analysts, the New York State attorney general has issued a subpoena to Salomon Smith Barney requesting that the firm produce all documents relating to research produced by Jack Grubman, Salomon's star telecommunications analyst.
The request covers communications between the firm's investment banking group and Mr. Grubman's research team and any material about how that team was compensated, according to a Salomon memorandum dated April 11 and obtained by The New York Times.
The New York state official, Eliot L. Spitzer, has requested documents dating back to January 1998 and related to 54 telecommunications companies, the memo states. The firm's lawyers issued the directive and advised employees to "preserve all documents that may be relevant to the subjects covered by the subpoena until you are advised otherwise in writing by the Office of the General Counsel."
Mr. Grubman, perhaps more than any other analyst, has become a lightning rod among investors who worry that Wall Street's recommendations on stocks have been biased by the firms' efforts to win business from the companies whose stocks they promote.
In the late 90's, Mr. Grubman urged investors to buy shares of untested telecommunications concerns and to stay with them as they plummeted in value after 2000. Even as he was promoting these companies' shares, the analyst was helping his firm win lucrative investment banking fees from issuing telecommunications securities. Although Mr. Grubman was not named in the memo, he wrote research reports on all but one of the 54 companies cited.
The Salomon memo indicates that the scope of Mr. Spitzer's investigation into conflicts of interest among Wall Street analysts is broad and that he is focusing on areas where investors who listened to analysts' advice lost significant amounts of money. By some estimates, investors in telecommunications companies saw more than $1 trillion in wealth evaporate in recent years.
By delving into the industry debacle, Mr. Spitzer could also turn up information about whether Salomon advised telecommunications companies on transactions that are now the subject of investigations by the Securities and Exchange Commission.
Mr. Spitzer met with the nation's top securities regulator yesterday in Washington and urged Congressional action to address the conflicts on Wall Street.
A spokeswoman for Mr. Spitzer would neither confirm nor deny that his office had subpoenaed Salomon Smith Barney, and a spokeswoman for Salomon Smith Barney declined to comment.
According to the Salomon memo, Mr. Spitzer has demanded notes of conversations by employees of the firm with representatives of the telecommunications companies and documents Salomon received from them; draft and final research reports on the companies; documents relating to analyst recommendations, ratings or price targets on the companies' securities; and communications between Salomon's investment banking department and its research group about any of the companies.
Mr. Spitzer has also asked for documents concerning attempts by Salomon to obtain investment banking work from the companies, whether successful or not. This material includes contracts and the fees to be generated by such engagements, so-called pitch books or presentations used to drum up investment banking business, and all documents related to the allocation of compensation from investment banking deals to the research department or an analyst.
"The attorney general seems to be looking for evidence of tie-ins between investment banking and research at Salomon, particularly whether the firm used research as an incentive to attract investment banking clients," said Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels in New York, who had the memo's contents described to him. "Another issue seems to be whether the firm customized the research reports to retain and enhance fees coming from investment banking."
A former analyst said Mr. Grubman's employment contract could disclose a great deal, particularly how closely his pay was linked to investment banking deals he helped secure. The firm's pitch books could also be a gold mine of information, this person said, because they often indicate how the firm's analyst intends to rate the company after the offering is completed.
The information produced by Salomon could also show whether the investment bank helped telecommunications companies structure deals that resulted in increased revenue but that had little or no business rationale. Such transactions at Qwest and Global Crossing, and the way they were accounted for, are the subject of S.E.C. inquiries.
The companies that Mr. Spitzer is seeking information about from Salomon include large telecommunications concerns like AT&T, Verizon and WorldCom, as well as upstart carriers like Global Crossing, Level 3 Communications and Qwest. All were covered by Salomon's research department. Fourteen of the companies have either defaulted on their debt or filed for Chapter 11 bankruptcy protection; many trade below $10 a share. Mr. Grubman has dropped research coverage on 19 of the 54.
Salomon generated more in fees by underwriting telecommunications securities than any other Wall Street firm. From 1997 to late last year, it collected $809 million underwriting telecommunications stocks and bonds and $178 million providing merger advice, according to Thomson Financial. The total fees were 43 percent more than the fees collected by Merrill Lynch, its closest rival in the sector.
Merrill was the first firm cited by Mr. Spitzer for conflicts of interest in its research department. On April 8, after a 10-month inquiry, he obtained a court order against the firm forcing it to disclose in its research reports whether the company it was recommending was also one of the firm's investment banking clients.
Last week, Merrill agreed to broaden its disclosures and yesterday began identifying on its Web site those companies from which it has received investment banking fees in the previous 12 months. Merrill is continuing to work with Mr. Spitzer to correct what he has called "fundamental structural flaws" and to provide "permanent relief for the company's state securities law violations."
Along with pressing for changes in their practices, the attorney general could bring criminal charges against Wall Street firms. |
