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Is Citi's Weill Outward Bound?

The Increasingly Twisted Twists And Turns In The Grubman Affair Are Becoming A P-R Nightmare That Could End His Tenure

Nov 15, 2002 | BUSINESSWEEK.COM It's the upgrade he can't live down. And it may end up taking him down. In the wake of embarrassing e-mail leaks to newspaper reporters, Citigroup (C ) CEO Sanford Weill admitted on Nov. 13 that he had urged controversial telecom analyst Jack Grubman to "take another look" at AT&T (T ) stock in 1999.

Investigators, including New York Attorney General Eliot Spitzer, have been investigating Grubman's November, 1999, upgrade of AT&T stock from a "hold" to a "buy." Why? Six months after the upgrade, Citi landed a lucrative IPO underwriting contract from AT&T, which netted the bank $45 million. Grubman subsequently downgraded the stock in October, 2000.

Weill's revelation came fast on the heels of a Wall Street Journal story citing an e-mail Grubman sent to a buddy, in which claimed he upgraded the stock to help Weill convince Citi's board to oust Weill's nemesis, co-CEO John Reed. AT&T CEO Michael Armstrong sat on Citigroup's board at the time.

"UTTER NONSENSE." Weill says he never "told an analyst what he or she had to write." This may be a smoking gun, but the widespread perception that pressure was applied has most of Wall Street taking bets about whether Weill can survive the scrutiny of how he ran the Street's biggest firm at the height of the technology bubble.

The speculation has intensified with the latest Grubman e-mail to hit the papers, in which the ex-analyst claimed the AT&T upgrade was a thank you to Weill for help in getting Grubman's twin toddlers into an elite and expensive nursery school on Manhattan's Upper East Side ($14,000 annual tuition per child). Weill dismissed this portion of Grubman's e-mail as "utter nonsense," saying: "I tried to help Mr. Grubman because he was an important employee who had asked for my help."

Weill's explanation defies common sense. After all, while what Weill has admitted to asking Grubman to rethink his decision on AT&T stock wasn't illegal, it's not exactly confidence-inspiring. What CEO doesn't know the effect that asking an employee to rethink a decision will have?

HORRIBLE TIMING. One point getting lost in the outrage over these humiliating disclosures is that none of this was news to investigators. In fact, the e-mail was turned over to Spitzer's office months ago, by Citigroup. And in testimony before Spitzer's investigators this summer, Grubman said he had fabricated both e-mail explanations for the AT&T upgrade.

In a statement on Nov. 13, he reiterated the same line, saying: "I have said a number of inappropriate, even silly, things in a few private e-mails that have been made public over the last few months. The contents of these particular e-mails, while personally embarrassing, are completely baseless."

The entire episode is a public-relations debacle. And the e-mail stories have come at the worst possible time for the embattled head of Citigroup. Regulators, including the Securities & Exchange Commission Director of Enforcement Stephen Cutler, Spitzer, and other state attorneys general, are in the midst of discussions on how much to fine Wall Street firms for issuing conflicted research in the late 1990s. Top penalties are said to be in the $250 million range and Citi is sure to warrant some of the stiffest treatment.

LITIGATION MORASS. It might end up doling out even more. In an SEC filing Nov. 13, Citi revealed that more than 60 lawsuits have been filed against the bank related to misguided advice from analysts, including Grubman. An additional 10 suits are pending related to the bank's dealings with failed energy giant Enron. Generally, individual investors aren't bringing these suits. Instead, they're being filed by pension funds or class-action attorneys so each suit potentially represents thousands of claimants, and settlements in the millions. A Citigroup spokeswoman declined comment on the pending litigation.

Things don't look so hot on the business front either. On Nov. 14, US Bancorp analyst Andrew Collins, generally a Citi bull, lowered his fourth-quarter earnings estimates by 4 cents a share, to 75 cents. Collins says he expects credit costs will be higher in Argentina and Japan. He also raised his fourth-quarter credit-loss provision estimate by $200 million, to $2.9 billion, based on potential losses in telecom, energy, Argentina, and Brazil. A Citigroup spokeswoman says it's important to emphasize that the bank continues to perform well overall in a difficult environment.

Meanwhile, Citi's reputation in an entirely different area is also in the spotlight's glare. The Rain Forest Action Network (RAN), an environmental group that has staged protests outside Citi's annual meeting for years, has intensified its efforts. The San Francisco-based group ran a full-page ad in the Nov. 13 New York Times, complete with photos of ravaged forests and soot-spewing smokestacks.

TREACHEROUS SHOALS. "Citigroup is using your money to fuel environmental destruction around the world," the tagline read. On Nov. 15, RAN members chained themselves to Citi branches in San Francisco and Washington, D.C., urging consumers to cut up their Citi credit cards and pleading with the company to review its environmental policies.

Weill is known for his ability to buck the odds. And for a while, it looked as though he could hang onto his top job at Citi and navigate his way through the treacherous shoals of the Wall Street investigation. Now, the odds against his survival are increasing by the hour. But his departure would hardly end the bank's woes.

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