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Suit: Analysts Lied In Their Ratings

Oct 1, 2002 | Bloomberg News

Salomon Smith Barney's former analyst Jack Grubman and his colleagues made it clear in e-mails and memos they didn't believe the ratings they assigned to companies such as Winstar Communications, which were clients of the Citigroup investment-banking unit, according to a lawsuit filed by New York Attorney General Eliot Spitzer.

Spitzer yesterday sued executives of telecommunications companies that awarded investment-banking business to Citigroup after they received sought-after shares in initial public offerings and their companies benefited from optimistic stock recommendations from Salomon Smith Barney.

The following are excerpts from some of the e-mails and memos. The brackets were added by Spitzer in the filing.

Sherlyn McMahon, a senior research associate under Grubman, sent him an e-mail relating a conversation with an institutional investor: "She just thinks that we make ourselves look stupid by recommending names right up to the point of bankruptcy like WCII (Winstar), XOXO (XO Communications), MFNX (Metromedia Fiber). She understands the banking relationship aspect."

Later that afternoon, Grubman wrote an e-mail to Kevin McCaffrey, head of U.S. research:

"Most of our banking clients are going to zero and you know I wanted to downgrade them months ago but got huge pushback from banking. I wonder what use bankers are if all they can depend on to get business is analysts who recommend their banking clients."

Salomon ranked stocks from 1 to 5, with one a "buy," 2 an "outperform," 3 a "neutral," 4 an "underperform" and 5 a "sell." Executives of Focal Communications, a Salomon banking client, complained about part of a Grubman report in February 2001, in which he rated the stock "buy." Grubman said in an e-mail to two Salomon bankers:

"If I so much as hear as one more peep out of them, we will put the proper rating (i.e. 4 not even 3) on this stock, which every single smart buysider feels is going to zero. We lost credibility on MCLD and XO because we support pigs like Focal."

McMahon received an e-mail from a client that day asking, "Focal and McLeod are pigs aren't they?" McMahon responded, "FCOM definitely MCLD hold not sell."

In the lawsuit, Spitzer said that from 1998 through 2000, Salomon Smith Barney analysts issued "virtually no sell or underperform ratings for the more than 1,000 stocks they rated."

John Hoffman, the brokerage's head of global equity-research management, wrote in a 2000 memo to Michael Carpenter, then chairman, that there was "legitimate concern about the objectivity of our analysts which we must allay in 2001."

In a presentation at a Citigroup retreat on stock recommendations as of Jan. 29, 2001, Carpenter said there were no "sell" and only one "underperform" ratings among the 1,179 companies covered by research.

"Ridiculous on face," Hoffman said in handwritten notes attached to the presentation.

Salomon Smith Barney's "research was basically worthless," Jay Mandelbaum, then global head of Salomon Smith Barney's retail stock-selling division, told Hoffman in February 2001.

The lawsuit said Mandelbaum threatened to terminate his unit's contribution to the research budget.

Hoffman wrote Carpenter in December 2000 that one of his goals since becoming global director of research was "to better integrate our research product with the business-development plans of our constituencies, particularly investment banking."

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