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Overly Bullish Salomon Fined $5M

Sep 24, 2002 | The Guardian

The US securities regulator last night imposed a near record fine on investment bank Salomon Smith Barney and filed a separate complaint against former star telecoms analyst Jack Grubman.

The actions were brought for issuing misleading research reports on Winstar Communications, a broadband telecoms company that went bankrupt in April last year.

The filing makes damaging allegations against Mr Grubman, one of the most highly paid and influential analysts on Wall Street during the stock market boom years. Mr. Grubman could be suspended or fined under NASD proceedings.

Winstar was an investment banking client of Salomon and the NASD alleged that the bank's overly bullish advice to investors was compromised by that relationship.

"What occurred in this case was a serious breach of trust between Salomon and its investors," said Mary Schapiro, at the NASD.

Salomon had an investment banking relationship with Winstar between February 1999 and July 2001 and helped the telecoms firm raise $5.6bn (£3.6bn). During that time, Salomon earned $24m in fees.

The bank has been fined $5m, the third highest penalty imposed in the NASD's history. The regulator added that the settlement related only to Winstar and further penalties or charges might be brought for misleading research notes on other companies.

Salomon is already under scrutiny for its relationship with WorldCom and Global Crossing, which have both filed for bankruptcy.

The complaint against Mr. Grubman and his assistant Christine Gochuico noted that they had kept a "buy" rating on Winstar and set a price target of $50 a share even as the stock fell to 14 cents. In the settlement, Salomon admitted that there was no reasonable basis for the target price.

In an internal email used as evidence, Mr. Grubman said: "If anything the record shows we support our banking clients too well and too long."

Salomon parent Citigroup said the company was pleased that a settlement had been reached. "This settlement is consistent with our determination to do all that we can to resolve the issues facing Salomon Smith Barney."

The founder of cable industry pioneer Adelphia Communications, John Rigas, and two of his sons were yesterday indicted on fraud charges.

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