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NASD Poised to File Civil Charges Against Salomon and Former Analyst

Sep 20, 2002 | The Wall Street Journal

The National Association of Securities Dealers is preparing to file administrative charges of securities fraud against Salomon Smith Barney and its former telecommunications analyst Jack Grubman, people familiar with the matter told The Wall Street Journal.

The charges would stem from the firm's positive research reports on Winstar Communications Inc., a telecommunications company that filed for bankruptcy-law protection last year, these people said.

The NASD's enforcement arm has notified lawyers for the big securities firm and Mr. Grubman that it could file an administrative case as early as Monday, though negotiations are continuing and the situation could change, these people say. Salomon may be able to persuade the NASD to settle on lesser charges amid the continuing negotiations.

The NASD has focused on whether Mr. Grubman misled investors by touting shares of Winstar, one of Salomon's investment-banking clients, amid evidence that the company was in deep financial trouble, people familiar with the matter say. Mr. Grubman had been a vociferous bull on the stock for several years, and he continued to support the company in his research even as evidence began to emerge in early 2001 about Winstar's financial problems.

Any NASD civil action would mark the first major case by federal securities regulators investigating whether big securities firms obtained investment- banking business by making overly optimistic stock picks. Charles Prince, Salomon Smith Barney's new chief executive, met yesterday with Mary Schapiro, head of the NASD's regulatory division, to discuss the Winstar case, people familiar with the meeting say. Mr. Prince is intent on settling the matter as soon as possible, these people say.

The moves signal that Citigroup Inc. (NYSE: C - News) and its Salomon Smith Barney unit are aggressively seeking to put a number of regulatory woes behind them.

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