Telecom analyst, Salomon part ways
Grubman's resignation called 'mutual agreement'
By Gretchen Morgenson
NEW YORK TIMES NEWS SERVICE
August 16, 2002
NEW YORK – Jack Grubman, the beleaguered telecommunications analyst who was once among the most powerful figures on Wall Street, resigned from Salomon Smith Barney yesterday in what the firm described as "mutual agreement."
During the bull market in technology shares, no one was more euphoric about the promise of upstart telecommunications companies than Grubman. And he remained upbeat on most of the companies he followed long after their fortunes had declined and even as some sank into bankruptcy.
An estimated $2 trillion has been lost by investors and lenders who put money into the telecommunications industry. Of the 25 largest bankruptcy filings in the United States, 10 were made by telecommunications companies. Grubman had recommended the stocks of all of them.
Grubman and his firm fared much better. Acting not only as an analyst recommending stocks to investors, but also as an investment banker advising telecommunications companies on strategy, Grubman helped his firm win almost $1 billion in fees during the late 1990s. He earned an average of $20 million annually in recent years.
But with his dual roles he also came to personify the conflicts of interest at brokerage firms that have done significant damage to investor confidence in recent months.
In the letter of resignation he submitted to Salomon, Grubman said his work as an analyst was being extensively second-guessed and that the current criticism made it impossible for him to do his job.
While he said he regretted that he had failed to predict the collapse of the telecommunications industry, he said: "I am nevertheless proud of the work I, and the analysts who worked with me, did." He added that he felt he had been unfairly singled out for criticism.
In a memo to Salomon employees, Michael A. Carpenter, the firm's chairman, called Grubman a "valued member of our research team" and said the analyst had always conducted himself professionally and in accordance with legal and ethical standards.
On leaving, Grubman will receive what remains of a lucrative five-year contract struck in 1998, said an individual who has seen the agreement. A $19 million loan will be forgiven and he will receive approximately $12 million in stock and stock options he has earned over the years.
By choosing to leave at a time when shares of Citigroup, Salomon's parent, are languishing – they are down 29 percent on the year – Grubman is walking away from a lot of money he could have had if he had stayed another year and the stock had recovered.
A spokesman for Citigroup said the firm would continue to pay Grubman's legal bills.
Grubman's activities are being investigated by securities regulators and by Eliot Spitzer, New York's attorney general. Grubman is also the subject of numerous lawsuits by investors who bought shares on his recommendation in now-bankrupt companies, including Rhythm Netconnections, Winstar Communications and Global Crossing.
Grubman's departure had been rumored for months. People inside the firm said Sanford I. Weill, chairman of Citigroup, was disappointed in Grubman's testimony before Congress in July. The House Financial Services Committee, which is investigating the collapse of WorldCom, had asked Grubman to testify about his role as the prominent analyst in the industry.
Grubman's ardor was especially steadfast for WorldCom, a company he helped create by advising its founder, Bernard J. Ebbers, on many of its 65 acquisitions. Grubman recommended buying WorldCom's stock until just a few days before the company announced in late June the enormous accounting misstatement that helped force it into bankruptcy.
"Mr. Grubman's departure could be very favorable for investors suing him and Salomon Smith Barney, and could open up opportunities for regulators as well as criminal prosecutors," said Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels in New York. "Now you have a situation where the firm's position and Grubman's may not be consistent and therefore may not be mutually reinforcing. This could have unfavorable implications for the defenses which both the firm and Grubman intend to mount."
Grubman had extraordinarily close ties to the companies he followed. According to a document released by the House committee, he attended 10 board meetings at several companies in the late 1990s, including WorldCom, McLeodUSA and Broadwing. It is highly unusual for analysts to attend company board meetings.
For years Grubman's cheerleading for the telecommunications industry helped win his firm the top rank among investment banking firms in the sector. Between 1997 and 2001, Salomon collected $809 million in fees for underwriting telecommunications stocks and bonds, and collected $178 million for providing merger advice, according to Thomson Financial. The total was 43 percent more than the fees made by Merrill Lynch, its closest rival in the sector.
Among the telecommunications companies Salomon brought public or underwrote securities for in the period were Global Crossing, Metromedia Fiber Networks, McLeodUSA, Winstar Communications, Qwest Communications, Flag Telecom Holdings, Rhythms Netconnections, XO Communications. All but one of these companies – Qwest – has filed for bankruptcy.
Citigroup also announced yesterday several management changes within Salomon Smith Barney, to separate the firm's investment banking and equity research businesses. Equity research will now report to Robert Druskin, a 33-year veteran of Citigroup, who was named president and chief operating officer of Salomon, a new position at the firm. The investment banking business will still report directly to Carpenter, the Salomon chairman. |
