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Salomon Got Millions For Local Deals

Apr 30, 2003 | Rocky Mountain News

Salomon Smith Barney generated investment banking revenues of more than $150 million from deals involving Broomfield's Level 3 Communications and $40 million from Qwest Communications, according to documents released this week.

Most of the big fees came as the New York investment banking firm's star analyst Jack Grubman continued to give rosy ratings to the companies' stocks.

The investment banking transactions were disclosed as 10 securities firms, including Citigroup's Smith Barney, agreed to pay $1.4 billion to settle charges that analysts published misleading research reports that helped their firms win investment-banking business. The securities firms neither admitted nor denied the charges.

Grubman was barred from the securities industry for life. Once considered the most influential telecom analyst, Grubman in 1996 had bragged to Qwest founder Philip Anschutz that he could help Anschutz get then-AT&T executive Joe Nacchio to run Qwest. Grubman did.

The documents released Monday show that Salomon Smith Barney, now Smith Barney, completed 11 investment banking transactions with the fiber-optic company Level 3 between 1998-2002, generating $152.3 million of revenues for the investment banking firm.

The deals included managing bond and stock offerings and other financial services. Smith Barney received $12 million as an adviser on the July 2002 deal that brought $500 million into Level 3 from a group that included Omaha billionaire Warren Buffett.

Another four transactions between Smith Barney and Level 3 weren't completed, according to the documents. Level 3 declined to comment Tuesday about its relationship with the firm.

The Nasdaq stock market peaked in March 2000 and soon was declared a bear market.

But Grubman maintained his "buy" rating on Level 3 long after. In an April 18, 2001, research report, Grubman finally lowered his price target to $20 (Level 3 was trading at $13 a share at the time), down from what he acknowledged was an "embarrassingly stale $130 target."

Level 3 stock hit a low of $2.15 in February 2002 and now is trading just under $6.

Meanwhile, Salomon Smith Barney generated $40.8 million of investment banking fees from Qwest on 14 transactions between 1997-2000, according to the documents. Qwest declined to comment Tuesday.

The transactions included work with Qwest on its initial public offering, bond offerings and a repurchase of $1 billion worth of Qwest shares from BellSouth in early 2001.

At the time Qwest was buying back stock, Nacchio was selling Qwest stock.

Grubman maintained his "buy" rating on Qwest until March 2002, even though he and two colleagues acknowledged in a Nov. 14, 2001, memo that the firm had missed on its recommendation of Qwest stock.

In a May 18, 2001, e-mail, Grubman referred to pressure from the investment banking side of the business to give certain companies higher ratings. "If anything the record shows we support our banking clients too well and too long," he wrote.

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