Regulators fined Salomon Smith Barney $5 million Monday on charges that its former analyst, Jack Grubman, relentlessly touted a telecom stock despite signs that the company was in severe financial trouble.
The National Association of Securities Dealers also brought a similar complaint against Grubman and his assistant, analyst Christine Gochuico. They are contesting the allegations and could face stiff penalties if found guilty in an NASD civil hearing, including monetary fines or a permanent bar from the industry.
Salomon and the two analysts were charged with breaking several NASD rules, including those barring misleading statements to investors. However, they were not charged with potentially more-serious infractions of fraud or intent to deceive investors.
Salomon, a unit of Citigroup Inc., settled the case without admitting or denying wrongdoing.
The NASD alleged that Grubman went out of his way to talk up the prospects of Winstar Communications Inc. despite having no logical basis for his optimism. For example, Grubman steadfastly maintained that Winstar’s stock would rise to $50, even as it sank to 14 cents per share, the NASD alleged. When others on Wall Street questioned Winstar’s prospects, Grubman shot back with reports praising the company while “belittling and attacking” Winstar’s critics, the NASD said.
The $5 million penalty was the third-largest ever levied by the NASD. But it was only a fraction of the $24 million in investment banking fees that Salomon earned from Winstar.
The fine “is a drop in the bucket” for a financial company the size of Citigroup, said Jacob Frenkel, a former Securities and Exchange Commission official, and suggests the company may already have set aside a much larger amount to cover liability in other public and private legal actions.
Still, the action by the NASD represents a major crackdown by market regulators in their two-year scrutiny of Wall Street stock analysts, and may herald further charges against Salomon and other companies .
Grubman once was among the most prominent analysts on Wall Street, earning $20 million per year. He was credited during the 1990s bull market with going beyond the traditional analyst role of simply handicapping stocks to becoming a dealmaker who helped to broker lucrative investment-banking work.
But as the market began to tumble, regulators launched investigations into whether Grubman and other analysts misled investors by tailoring research to favor corporate clients. The NASD noted in its complaint that Winstar did “significant” investment-banking business with Salomon.
Grubman resigned from the firm last month.
New York’s Winstar, which provided telecom services to corporations, was never profitable and eventually filed for bankruptcy protection in April 2001. Winstar announced Aug. 5 that it was slashing 44 percent of its workforce.
Part of the evidence against Grubman and Gochuico are e-mails they wrote in which they appeared to express doubts about Winstar’s prospects even while they recommended the stock to investors.
Earlier this year, Merrill Lynch & Co. paid a $100 million fine after a investigation by New York Attorney General Eliot Spitzer revealed a series of e-mails in which analysts derided stocks among themselves even while pitching them to investors.
According to the NASD, Gochuico also privately counseled some favored investors to sell Winstar shares at prices far below $50. In one instance cited by the NASD, she told an investor to buy the stock at around $13 per share and to sell in the “low $20s.”
The complaint also paints a picture of a close relationship between the analysts and the company. In some cases, they sought approval from Winstar prior to issuing reports, the NASD charged.
The NASD stressed that the settlement announced Monday is narrow in scope and that it would continue to pursue its far broader investigation into Salomon.