`We Support Pigs': Grubman's E-mails on His Ratings (Update1)
By Phil Serafino and George Stein
New York, Sept. 30 (Bloomberg) -- Salomon Smith Barney Inc.'s former analyst Jack Grubman and his colleagues made clear in e- mails and memos that they didn't believe the ratings they assigned to companies such as Winstar Communications Inc., which were clients of the Citigroup Inc. investment banking unit, according to a lawsuit filed by New York Attorney General Eliot Spitzer.
Spitzer sued executives of telecommunications companies that awarded investment-banking business to Citigroup after they received sought-after shares in initial public offerings and their companies benefited from optimistic stock recommendations from Salomon Smith Barney. The suit didn't name Grubman as a defendant.
Grubman's lawyer Lee Richards said in a statement that Grubman ``had no responsibility for, nor did he influence, IPO allocations to telecommunications executives.''
``The suggestion in the complaint that Mr. Grubman's research was somehow altered to help enrich executives who received IPO allocations or to obtain their investment banking business is categorically false,'' Richards said.
The following are excerpts from some of the e-mails and memos. The brackets were added by Spitzer in the filing.
Sherlyn McMahon, a senior research associate under Grubman, sent him an e-mail relating a conversation with an institutional investor: ``She just thinks that we make ourselves look stupid by recommending names right up to the point of bankruptcy like WCII [Winstar], XOXO [XO Communications], MFNX [Metromedia Fiber]. She understands the banking relationship aspect.''
Later that afternoon, Grubman wrote an e-mail to Kevin McCaffrey, head of U.S. research:
``Most of our banking clients are going to zero and you know I wanted to downgrade them months ago but got huge pushback from banking. I wonder what use bankers are if all they can depend on to get business is analysts who recommend their banking clients.''
Salomon ranked stocks from 1 to 5, with one a ``buy,'' 2 an ``outperform,'' 3 a ``neutral,'' 4 an ``underperform'' and 5 a ``sell.'' Executives of Focal Communications Corp., a Salomon banking client, complained about some aspects of a Grubman report on Feb. 21, 2001, in which he rated the stock ``buy.'' Grubman said in an e-mail to two Salomon bankers:
``If I so much as hear as one more f---ing peep out of them, we will put the proper rating (ie. 4 not even 3) on this stock, which every single smart buysider feels is going to zero. We lost credibility on MCLD and XO because we support pigs like Focal.''
McMahon received an e-mail from a client that day asking, ``Focal and McLeod are pigs aren't they?'' McMahon responded, ``FCOM definitely MCLD hold not sell.'' Focal spokesman Andy Sachs declined to comment.
Spitzer said in his lawsuit that from 1998 through 2000, Salomon Smith Barney research analysts issued ``virtually no sell or underperform ratings for the more than 1,000 stocks they rated.''
John Hoffman, head of Salomon Smith Barney's head of global equity research management, wrote in a 2000 memo to Michael Carpenter, then chairman of Salomon Smith Barney, that there was ``legitimate concern about the objectivity of our analysts which we must allay in 2001.''
In a presentation at a Citigroup retreat in Armonk, New York, on stock recommendations as of Jan. 29, 2001, Carpenter said there were no ``sell'' and only one ``underperform'' ratings among the 1,179 companies covered by research.
``Ridiculous on face,'' Hoffman said in handwritten notes attached to the presentation.
Jeffrey Waters, associate director of U.S. equity research, told Salomon Smith Barney participants at a January 2000 ``Best Practices'' seminar:
``When you look at the market share gap between us and the three competitors who are trying to close, when I just eyeballed it, it looked to me like there is something like roughly a billion dollars of, maybe not equity capital markets but investment banking revenue, on the table for this firm.
``And that's a lot of money. And it's clear that research is driving a lot of this increasingly, and therefore as a [research] department, our goal has to be, to be a really effective partner in terms of helping drive initiation, execution and everything else, because there is a lot of money on the table for this company. And we'll all benefit from it.''
Salomon Smith Barney's ``research was basically worthless,'' Jay Mandelbaum, then global head of Salomon Smith Barney's retail stock-selling division, told Hoffman in February 2001. The lawsuit said that Mandelbaum threatened to terminate his unit's contribution to the research budget.
``There is a continuing shift in the rationalization that an analyst is the key element in banking success,'' Hoffman wrote in a 1998 presentation to key executives of Travelers Group Inc., then parent of Salomon Smith Barney.
Hoffman wrote Carpenter in December 2000 that one of his goals since becoming global director of research was ``to better integrate our research product with the business development plans of our constituencies, particularly investment banking.''
From 1999 through 2001, Salomon Smith Barney's U.S. research unit requested a year-end performance assessment from analysts and ``suggested'' they ``obtain collaborative feedback from their investment banking counterpart regarding establishing and modifying a list of coverage priorities.''
A technical analyst -- who rates stocks based on price chart and volume statistics rather than a company's business prospects - - downgraded Winstar on two occasions. When an institutional investor sent Grubman an e-mail asking that the analyst be punished, Grubman forwarded the message to his bosses, asking that something be done about the analyst. He expresses concern the analyst may also downgrade Level 3 Communications Inc., for which Salomon was marketing a stock sale.
``Here is yet another request that we should punish the technical analyst so that it does not impact us on Level 3,'' wrote Grubman. ``On the roadshow, I want to be able to say we are taking action on the technical analyst, otherwise investors will be afraid that the same thing will happen to Level 3.''
Grubman cited his contributions to investment banking in response to a request from equity research management, which was trying to determine his compensation for 2001.
``We were a lead manager in a $450 million overnight convertible offing of XOXO and a $750 million high yield offering for MCLD in January,'' Grubman wrote.
``We were a joint-lead manager for FON's (Sprint Corp.'s) secondary offering of $3 billion and we were a book-running manager of WCOM (WorldCom Inc.) $12 billion debt deal; in April/May. In addition, we were joint lead in a $300 million equity and $450 convertible offering for Citizens Communications, an S&P 500 company, on which we initiated coverage of June 20 following the offerings. We received the mandate for joint books on AT&T s current $5 billion debt offering.''
Grubman attached a four-page, single-spaced investment banking schedule to his memo, which, according to the lawsuit, listed the following business he had helped to bring in: 22 mergers and acquisitions; 15 equity offerings; 6 private equity transactions; 21 investment grade debt offerings; 12 bank loans; four derivative transactions; 15 high-yield offerings; and two other, unspecified transactions. |
