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NASD Prepares Action Against Salomon's Grubman

Jul 22, 2002 | Dow Jones The National Association of Securities Dealers is preparing to take regulatory action against Jack Grubman, a Salomon Smith Barney research analyst whose bullish telecom calls had made him a star on Wall Street, Monday's Wall Street Journal reported.

Meanwhile, people close to the firm said Monday that the U.S. Attorney in Manhattan has joined state and federal regulators investigating research at Salomon Smith Barney, including the work of Mr. Grubman. A spokesman for the U.S. Attorney's office didn t return a call for comment, and a Salomon spokeswoman had no comment.

The probe, however, doesn t appear to focus just on Mr. Grubman, these people say. The U.S. Attorney's request for information was broad; while it covered Mr. Grubman's activities, it covered other analysts at the firm as well.

The NASD's move marks the first major crackdown by federal securities regulators investigating how big securities firms obtained investment-banking business with overly rosy stock picks.

The NASD's regulatory arm has notified Mr. Grubman that its enforcement staff is prepared to allege that he and his firm violated securities rules over his research on Winstar Communications ( WCII - News) Inc., a former Wall Street darling that filed for bankruptcy protection in April 2001 .

At issue for Mr. Grubman and the Citigroup Inc. (NYSE: C - News) unit are allegations by regulators that the analyst misled investors by touting shares of Winstar, a Salomon Smith Barney investment-banking client, amid evidence that the company was in deep financial trouble, people familiar with the matter say.

A Salomon Smith Barney spokeswoman said in a statement "as always we will cooperate with any inquiry." She said "Mr. Grubman's calls on Winstar were part of a consistent and reasonable investment thesis held in good faith for many years. There was no intent to mislead investors."

Mr. Grubman, 49 years old, said through the spokeswoman that he had no comment, but a recent regulatory filing describing the NASD's actions indicates that he "denies having engaged in any such violation."

Mr. Grubman had been a big backer of Winstar, which provided phone and high- speed data services to companies and government agencies, right up to the firm's Chapter 11 bankruptcy filing last year, defending the firm even as strong evidence emerged that questioned the company's ability to survive, records show. If a case is filed -- the NASD typically files civil administrative actions, not lawsuits -- Mr. Grubman would be the first major analyst to be taken to task by federal securities regulators during their current crackdown on the Wall Street research business.

The NASD, Wall Street's main self-regulatory agency, is considering a range of allegations against both Mr. Grubman and Salomon Smith Barney, the people close to the matter say, including securities fraud and violations of NASD rules that bar analysts from making misleading statements to investors. Although no final decision has been made, Mr. Grubman and his firm could also face a wide array of sanctions, including millions of dollars in fines and other penalties, such as a suspension or a bar from the securities industry.

Over the past decade, Mr. Grubman has come to symbolize the changing face, and growing clout, of Wall Street analysts. Acting as a filter between the stock market and investors, analysts once toiled in obscurity, writing reports on companies, making earnings forecasts and recommending which stocks investors should buy or sell.

Mr. Grubman helped change all that. Instead of simply assessing stocks, Mr. Grubman and his peers increasingly promoted them, and focused on helping bring in investment-banking deals for their firms. A few top analysts evolved into Wall Street's equivalent of rock stars, reaping huge bonuses and investor adulation. Mr. Grubman, for instance, recently told Congressional investigators that his annual pay averaged about $20 million during the past several years. This made him one of Wall Street's highest-paid executives.

Any NASD action could be costly to Mr. Grubman. The analyst could be forced to give back as much as $15 million of a forgivable loan he received from Salomon Smith Barney if a regulatory charge led to his departure from the firm, according to his employment contract. The contract adds that Mr. Grubman would be able to appeal that penalty straight to the top: Citigroup Chairman and Chief Executive Officer Sanford I. Weill.

The NASD, which last year became one of the first regulatory agencies to look at analysts, is investigating Mr. Grubman's issuing of positive research reports on Winstar during the winter and spring of last year, even as strong evidence began to emerge from other analysts and investors that the communications company was under financial duress, people with knowledge of the inquiry say.

Meanwhile, Salomon Smith Barney isn't the only firm under the spotlight.

Morgan Stanley (MWD), in its quarterly report filed earlier this month with the Securities and Exchange Commission, said in an update on legal matters that it "has continued to receive and respond to requests for documents and information from the New York state attorney general in connection with his investigation of the company's research analyst practices."

The firm added it "has received and is responding to subpoenas and requests for documents and information in parallel industrywide investigations being conducted by other governmental and regulatory agencies," including the SEC, NASD, New York Stock Exchange and U.S. attorney's office in Manhattan.

One person familiar with the U.S. attorney's request for information from Morgan Stanley said the office merely asked the firm to supply information it has already provided to other regulators in the multi-agency probe, which was announced in late April.

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