Analyst Grubman Helped Call Shots At Global Crossing, Touted Its Stock
By LAURIE P. COHEN and DENNIS K. BERMAN
Staff Reporters of THE WALL STREET JOURNAL
5/31/02
Jack Grubman, the embattled telecommunications analyst, was instrumental in the making of key management and business decisions at Global Crossing Ltd. for two years after the company went public in August 1998.
Mr. Grubman's activities in connection with Global Crossing, which is now in bankruptcy proceedings, may lend support to New York State Attorney General Eliot Spitzer's investigation into conflicts of interest among research analysts. Mr. Spitzer has already asked for and received Mr. Grubman's self evaluations, written for his employer, Citigroup Inc.'s Salomon Smith Barney unit, to determine whether his bonuses were tied to his role as an adviser, rather than as an analyst, in mergers and other transactions.
Mr. Grubman personally recommended the hiring of one of Global Crossing's chief executives, Robert Annunziata, according to people familiar with the matter. The analyst also helped to negotiate Global's merger agreements with U S West Inc. and Frontier Corp. and advised Global Crossing Chairman Gary Winnick on Mr. Winnick's own stock sales, according to these people.
In so doing, Mr. Grubman far exceeded analysts' traditional function of offering impartial advice to shareholders and investors. Although Mr. Grubman has been criticized in the past for playing a similar role at other telecommunications companies such as WorldCom Inc. and Qwest Communications International Inc., his involvement at Global Crossing appears to have been more extensive.
As an analyst, Mr. Grubman was consistently bullish on Global. After Salomon advised Global on its 1998 stock offering, Mr. Grubman wrote, "We believe Global Crossing is building a truly unique and very valuable strategic asset."
Bermuda-based Global Crossing saw its fortunes rise swiftly as the company built a vast international network of fiber optics, aimed at satisfying expected demand for telecommunications capacity. Mr. Grubman attained star-like fame as an analyst with a sharp ability to pick lucrative investments in the booming sector.
The analyst's enthusiasm for Global never wavered until November 2001, two months before the company's bankruptcy-court filing. Demand for telecom capacity had fallen well short of the lofty levels first predicted by Mr. Grubman and many other analysts in 1998 and 1999. In a May 2001 note, he lowered his price target on Global shares to $30 from $70, but kept his buy rating and said the company remained a "core holding."
By November, with Global's shares trading at $1.07, Mr. Grubman finally cut his rating to a "neutral."
Mr. Winnick, who was new to the telecommunications industry, sought Mr. Grubman's advice and the two spoke almost daily in the months after Global Crossing went public, according to people familiar with the situation. Mr. Winnick remains Global's chairman.
Mr. Grubman's activities in connection with Global don't appear to violate federal securities laws, which require that people in possession of material nonpublic information not use it to make stock recommendations. Mr. Grubman refrained from issuing research reports on Global during the periods when he was advising on material transactions and he disclosed Salomon's involvement when he resumed writing.
However, New York state laws are far broader and may allow Mr. Spitzer to prosecute Wall Street firms for conflicts involving analysts, legal experts said.
At one point, Salomon itself had questions about Mr. Grubman's activities. Initially, Salomon wanted Mr. Grubman to refrain from writing about Global for at least six months after working on the Frontier deal. But Mr. Winnick, worried about losing his most bullish analyst, objected, and Salomon checked the rules governing black-out periods again. The firm determined that the rules would enable Mr. Grubman to resume writing reports two months after the Frontier deal was announced in March of 1999, according to lawyers familiar with the matter.
Mr. Grubman "was in a very conflicted position" with respect to Global, says John C. Coffee Jr., a professor of securities law at Columbia Law School. By the very nature of his deal-making involvement, Mr. Coffee says Mr. Grubman possessed material nonpublic information that he may not have fully disclosed to shareholders in his reports.
Mr. Grubman's de facto management role at Global Crossing coincided with the company's heyday, when it's stock hit a high of $61.375. By early 2000, Mr. Grubman began to withdraw from playing a conspicuous role in the company. At about the same time, Global's stock started to decline, though this largely reflected changing conditions in the market in which it operated.
Mr. Winnick acknowledged, through a spokesman, that he sometimes spoke about strategy with Mr. Grubman, but said he dealt more frequently with Salomon investment banker John Otto. Mr. Otto was traveling and couldn't be reached for comment. Mr. Winnick's spokesman said Mr. Grubman recommended Mr. Annunziata as chief executive, though others did, too. Mr. Winnick also acknowledged that Mr. Grubman had a role in the Frontier and U S West deals because Salomon was Global's investment banker.
Salomon Smith Barney responded to questions about Mr. Grubman's role in a statement, saying: "Without confirming whether any such client discussions took place, it should be noted that it is common for companies to speak to the analyst community to get an investor perspective."
The most controversial of Mr. Grubman's activities at Global Crossing may have been his role as investment banker during merger talks with Frontier, a Rochester, N.Y., telephone concern that Global acquired for $11.3 billion in stock. Mr. Grubman worked with Salomon's investment bankers and gave a presentation promoting the deal to Global Crossing's directors before they approved it.
Just a few months later, Mr. Grubman helped Global Crossing hammer out a $37 billion merger agreement with U S West, a Denver telephone concern. The deal was threatened by last minute disagreements on executive appointments. Mr. Grubman's solution -- only Mr. Winnick would be chairman -- was ultimately adopted. In the end, Global's bid was later topped by Qwest Communications.
At the same time, U S West did a tender offer for 9.5% of Global Crossing shares. Mr. Grubman advised Mr. Winnick to sell only half the personal shares he was entitled to sell into the tender offer. Mr. Winnick said at the time it "confirms my continuing commitment to" Global. He pocketed $350 million from the sale.
Mr. Winnick said through his spokesman that Mr. Grubman urged a reduced sale of Mr. Winnick's shares because institutions were concerned about a larger sale.
Mr. Grubman appears to have resumed the role of a more traditional analyst in February 2000, when Mr. Annunziata was replaced by Leo Hindery Jr., who became Global's fourth chief executive. Mr. Hindery was dismissed in October of that year. Mr. Grubman hadn't supported Mr. Hindery's selection, say people with knowledge of the matter.
The 54-year-old Mr. Winnick founded Global Crossing in 1997. In four short years, the former Drexel Burnham Lambert Inc. junk-bond salesman had built an undersea phone network linking five continents and 27 countries. At its peak, it had a market cap of $48 billion. But Global Crossing filed for bankruptcy-court protection in January. With $12 billion in debt, it is the fourth-largest company ever to file under Chapter 11 of the U.S. Bankruptcy Code. The Securities and Exchange Commission is investigating the company for possible securities fraud violations. Global Crossing has said it is cooperating with the probe.
Mr. Winnick was especially receptive to Mr. Grubman's counsel because he had no experience in telecommunications, according to former Global Crossing officials. With his deep contacts and years of work in the sector, Mr. Grubman served as an able "tour guide" as Mr. Winnick learned about the industry, according to a former Global Crossing board member. This person recalls, for instance, how Global Crossing would ask Mr. Grubman for his opinions on the company's capital-expenditure plans.
Currying Mr. Grubman's favor was particularly important for Global in 1998 and 1999, in the two years after the company went public. At the time, Mr. Grubman was the reigning telecom analyst on Wall Street, and a positive nod from Mr. Grubman gave a company an edge over the dozens of other competitors then jockeying for control of the newly deregulated telecommunications market.
"Jack Grubman was the Bruce Springsteen of telecom," Mr. Winnick said through his spokesman. |
