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Grubman Quits As Salomon Analyst

Aug 16, 2002 | The Washington Post Salomon Smith Barney stock analyst Jack Grubman, under federal investigation for touting telecommunications companies that were also lucrative clients of his firm, resigned today expressing "deep regret" for failing to predict a meltdown that cost investors billions.

Grubman, among the most powerful of a crop analysts who rose to prominence in the late 1990s, leaves with a severance package worth approximately $30 million, sources familiar with the situation said. That includes forgiveness of a $15 million loan he received in 1998, $12 million in restricted stock and options, and a $1.2 million cash payment to be made over the next 18 months.

In a letter to employees, Salomon chief executive Michael A. Carpenter defended Grubman's record, saying the analyst, who began his career at AT&T Corp. in the late 1970s, "always wrote what he believed and conducted himself professionally and in accordance with legal and ethical standards."

Grubman, an intense, 48-year-old Philadelphia native, has come under scrutiny in recent months for his close relationships with executives at a handful of failed telecommunications companies, including WorldCom Inc. and Global Crossing Ltd., that were also investment banking clients of Salomon Smith Barney.

In recent congressional testimony, Grubman acknowledged attending several WorldCom board meetings, an admission that surprised even Wall Street veterans. At the height of the boom in telecom stocks, Grubman was making $20 million a year, with much of his compensation coming from fees generated by bankers at Salomon, a unit of Citigroup Inc.

He kept "buy" ratings on many telecom firms until they were on the verge of bankruptcy. He did not put a "sell" rating on WorldCom until June 21, four days before the firm disclosed that it had improperly accounted for $3.9 billion in expenses over five quarters.

Grubman also long remained bullish on several other firms that are now either in bankruptcy protection or whose shares trade for pennies, companies such as Winstar Communications Inc., XO Communications Inc. and Qwest Communications International Inc.

During Grubman's tenure, Salomon became a dominant banker to the telecom industry, earning millions of dollars in fees by helping companies issue bonds and advising them on mergers and acquisitions. WorldCom, AT&T Wireless Services Inc. and Winstar alone generated $449 million in fees for Salomon between 1997 and 2001, according to Thomson Financial.

Critics, including New York state Attorney General Eliot Spitzer, who has been conducting a broad investigation into conflicts of interest among analysts, say Grubman essentially obliterated the "Chinese wall" intended to separate investment banking from ostensibly objective stock research on Wall Street. In an interview with BusinessWeek in 2000, Grubman defined himself as "banking intensive" and said that what had been a conflict between banking and research had become a "synergy."

A spokesman for Spitzer said last night that Grubman's resignation would not affect his ongoing investigation. Grubman declined to comment.

In addition to the New York attorney general, Grubman is being investigated by the Securities and Exchange Commission and the National Association of Securities Dealers, the self-regulatory body that oversees the Nasdaq Stock Market. The Justice Department is also investigating.

Meanwhile, the House Financial Services Committee, which has sent a subpoena to Salomon, is investigating whether the firm, under Grubman's direction, helped executives at telecom companies that were also Salomon banking clients obtain shares in initial public offerings of stocks that quickly rose in value, enabling the executives to pocket millions of dollars. Grubman and Salomon Smith Barney are also the subjects of multiple investor lawsuits and arbitration claims.

Throughout the rise and fall of the telecom sector, Grubman defended his opinions, saying he truly believed that a deregulated market would create enormous opportunities for smaller firms to compete in providing local telephone service. And he said the Internet age would create a vast demand for high-speed connections over fiber-optic lines. Many firms scrambled to build those networks, only to find themselves burdened with huge debts while the predicted demand for broadband service failed to materialize.

Grubman supporters point out that he had said these investments would be risky and that he helped people make a lot of money during the telecom boom.

In a resignation letter released to all Salomon employees today, Grubman echoed many of those themes.

"For the last seventeen years, I have worked assiduously to understand the fundamentals of the telecommunications industry and the various companies in that industry," he wrote, "to build lines of communication with the people who effect that business so as to enhance my understanding of it . . . all to make my research and my reports the very best they could be."

Despite widespread investor anger, Grubman wrote that he was "nonetheless proud of the work I, and the analysts who worked with me, did," but added that the "relentless series of negative statements" had made it impossible for him to continue to do his job.

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