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The King And I

Sep 29, 2002 | Fortune

Back when the stock market was booming, analyst Jack Grubman was the go-to guy on anything telecom. His kingpin status turned the Salomon Smith Barney unit of Citigroup into Wall Street's biggest telecom underwriter and netted Grubman $20 million a year. Now, both Salomon and Grubman (who was forced out of the firm in August) are being investigated for misleading investors with overly optimistic research. As FORTUNE went to press, there were reports that Citi was angling to settle with regulators, as well as speculation that to avoid being Citi's scapegoat, Grubman already has told or may be willing to tell investigators that at times he faced pressure to put out positive research when banking business was on the line.

This Jack Grubman sure isn't the one I knew during his early days on Wall Street. That guy never backed down from anybody when he wanted to voice an opinion. I first met him at a telephone conference in Texas in the mid-1980s, when he was fresh from AT&T to the Street and I was fresh on the telecom beat at the Wall Street Journal. He looked much as he does now, dark and lanky, but with a beard that made his jawline look stronger than it actually is.

He had adamant ideas about AT&T, and he wasn't afraid to voice them in language far more colorful than most other analysts'. You could always get him on the phone, and I talked to him three or four times a week. He knew the industry cold. But AT&T hated him because he was continuously bearish. He didn't care; his company sources were so deep that he found out what he needed to know.

He lived and breathed telecom. Former Qwest CEO Joe Nacchio was a pal, as was Dan Hesse, who eventually ran AT&T's wireless business. (For more on Grubman's ties, see "Birds of a Feather.") A few years ago Grubman admitted to me he'd become a workaholic: he said he spent 90% of his time working and 70% traveling. His voicemail still says he'll return calls "from anywhere in the world." He had little time for his family. Or for editors: he stopped returning my calls when I became one.

To me, any "I was pressured" defense would seem odd. Three years ago, before telecom imploded, Grubman said outright that he wasn't pushed to make buy recommendations. The case in point was AT&T, where Citicorp's CEO and Grubman's boss, Sandy Weill, was a board member.

In November 1999, Grubman upgraded the stock (which was at about $60) from neutral to a buy. (It's now around $12.) Wall Street whispered that Grubman changed his rating because Salomon wanted the IPO for AT&T's wireless tracker stock (and, the talk went, Weill talked Grubman into a rating change because Weill, an AT&T board member, wanted to help his buddy CEO Mike Armstrong).

Grubman told me at the time that neither allegation was true. "Despite all the banking I do," he said in December 1999, "I'm still No. 1 (on the Institutional Investor ranking of analysts), because I still do basic research. And I started thinking a couple of months ago that it was worth taking a close look" at AT&T's cable bet. Grubman claimed then that Weill had "no role" in influencing his stock ratings (though he talked with him twice a week).

Whatever was truly behind Grubman's wrong number on telecom, it wasn't sheer greed: Even in 1999, he said that he "had enough money to say 'screw it all,' " and quit Salomon. Right now I bet he's wishing he had done just that.

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