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Citigroup Chief Sanford Weill To Testify In Probe of Salomon

Oct 23, 2002 | Wall Street Journal

The New York attorney general's office, stepping up pressure on Citigroup Inc., will question Chairman and Chief Executive Sanford I. Weill after gathering new evidence in its broad investigation into research activities at the financial-services giant, people familiar with the matter say.

Attorney General Eliot Spitzer has informed Citigroup lawyers that the interests of the firm and Mr. Weill may have diverged in the investigation, the people say. The move signals that his office could be considering legal action against Mr. Weill personally, in addition to Citigroup, the people say.

It also could be a prosecutorial tool to put additional pressure on Citigroup to agree to a settlement involving a substantial penalty and a significant overhaul of its operations.

It isn't clear what new information the attorney general has uncovered. But people familiar with the matter say it broadly falls under Mr. Weill's activities involving the firm's rating of AT&T Corp., on whose board Mr. Weill serves. He recently announced he is resigning the seat.

Mr. Weill has offered to provide information to Mr. Spitzer's office, in addition to other prosecutors and Wall Street regulators pursuing inquiries into his role in analysts' conflicts at the firm, the people familiar with the matter said. Mr. Weill offered his cooperation after being informed about the notice to Citigroup that his interests and the company's may no longer be the same.

The enforcement arm of the National Association of Securities Dealers already had requested that Mr. Weill give a deposition, in a meeting set for Oct. 31, people familiar with the matter say. An NASD spokesman had no comment. Mr. Weill also has offered to talk to the Manhattan U.S. Attorney's office and the Securities and Exchange Commission, which also are pursuing investigations into Salomon's activities, a person familiar with the matter says.

"Under the direction of Sandy Weill, Citigroup has consistently cooperated with all regulators in the research investigations," a Citigroup spokeswoman said Tuesday. "We expected various regulators would want to hear from Sandy himself as we move toward the resolution of these matters. The scheduling of his appearance is an important step toward this end."

Mr. Weill recently brought in two prominent lawyers, Lawrence B. Pedowitz and John F. Savarese of the New York law firm of Wachtell, Lipton, Rosen & Katz, to represent him; both are former assistant U.S. attorneys. Martin Lipton, a founding partner of the firm and longtime friend of Mr. Weill's, said in a statement: "The notion that there could be any charge against Sandy Weill is inconceivable. There is no divergence between the interests of Sandy and Citigroup."

But the attorney general's office considered the notice to Citigroup an official warning, a person familiar with the matter says. A spokesman for Mr. Spitzer said: "We have a multiagency investigation under way. Mr. Weill has offered to meet with us, and we believe and he believes he has relevant information and we welcome his cooperation."

The separate focus on Mr. Weill, one of Wall Street's most powerful executives, marks a turn in the attorney general's probe into activities at Citigroup and its Salomon Smith Barney securities-firm unit. At issue is whether Salomon published overly optimistic research on telecommunications-company stocks during the market bubble of the late 1990s to win lucrative investment-banking contracts, misleading investors who bought these shares.

The five-month-long investigation widely regarded as the most aggressive one now looking into analysts' conflicts initially focused on the role of Salomon's former star telecom analyst Jack Grubman and a handful of other senior executives in touting stocks and maintaining business relationships with telecom companies. At issue is the extent to which they may have led investors to buy once high-flying stocks that have since tumbled.

The new development in the investigation raises the stakes for Citigroup, which faces a withering spotlight from various securities regulators over whether its research was tainted and whether its transactions with corporations and top corporate executives illegally helped the firm win lucrative underwriting contracts. Mr. Weill's offer to talk underscores how serious he is about seeking quick resolution of the issues raised in the probe.

Salomon already has offered to separate its investment-banking and research operations -- though not sever them completely -- as well as pay a fine that could total hundreds of millions of dollars. In its negotiations with Mr. Spitzer and regulators, Citigroup has used lawyers from the firm Wilmer, Cutler & Pickering, including its well-known partner Lewis Liman.

Mr. Spitzer's office is investigating the role played by Mr. Weill in Salomon's rating of AT&T, including a controversial upgrade made by Mr. Grubman in the fall of 1999, just before the telephone giant was planning a massive stock sale to finance its wireless unit. AT&T CEO C. Michael Armstrong is a longtime Citigroup board member.

Mr. Grubman, who is cooperating in Mr. Spitzer's probe, has said he changed his rating back in 1999 of a "hold" to the equivalent of a "strong buy" after what he regarded as nudging from Mr. Weill. Salomon Smith Barney ultimately won a top underwriting spot on the wireless deal and earned close to $45 million for its work. A few months after the deal, Mr. Grubman downgraded the stock.

Among the items Mr. Spitzer is reviewing is an apology Mr. Grubman wrote after he had omitted AT&T, a Salomon banking client, from a list of the top telecom players of the future. The analyst addressed his note of regret to Mr. Weill who, according to people close to the situation, had demanded the apology.

Citigroup representatives have said in the past that Mr. Weill "never told any analyst what to write."

The interviewing of Mr. Weill and other discussions between Citigroup and Mr. Spitzer's office could affect burgeoning discussions by that office, the Securities and Exchange Commission and other regulators over how to overhaul Wall Street's research practices to avoid rampant conflicts. Citigroup is a leading force in these talks with prosecutors and regulators, and the extraction of a drastic settlement from the firm could raise the bar for what its rivals will have to change.

Regulators looking to craft new regulations involving Wall Street research are scheduled to meet Thursday with officials from top securities firms to hash out plans that could include the creation of a new oversight board that would fund independent research to be used by major brokerage firms that deal with small investors, according to people close to the matter.

Several investigators, including Mr. Spitzer's office, also have focused on allegations of IPO "spinning" at Salomon -- allotting lucrative shares in initial public offerings to executives who help determine who gets their company's banking business. Earlier in the summer, Mr. Spitzer began an inquiry into Mr. Weill's role in the AT&T offering, subpoenaing documents from the company.

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