The Salomon Smith Barney unit of Citigroup Inc. agreed today to pay a $5 million fine to settle charges that it misled investors with overly optimistic research reports on Winstar Communications Inc., a broadband services provider that was also a lucrative Salomon investment-banking client.
The settlement with the National Association of Securities Dealers, an industry self-regulatory body, covers only charges related to Winstar. The NASD said a larger probe into Salomon will continue.
The regulatory group also filed complaints against Jack B. Grubman, Salomon’s former star telecom analyst, and Christine Gochuico, a Grubman assistant who co-wrote reports on Winstar. The NASD did not specify what punishment is being sought for Grubman and Gochuico. An agency official said possible remedies could include fines, suspension or expulsion from the securities industry.
Lawyers for both Grubman and Gochuico said their clients did nothing wrong.
The NASD said Salomon issued “materially misleading” reports on Winstar between January and April of last year, maintaining a “buy” rating on the stock and predicting it would rise in price to $50 in 12 to 18 months. Instead, Winstar dropped from approximately $20 on Jan. 25 to 14 cents on April 17 before filing for bankruptcy protection.
The NASD noted that between February 1999 and July 2001, Salomon earned $24 million in banking fees from Winstar. “What occurred in this case was a serious breach of trust between Salomon and its investors,” Mary L. Schapiro, NASD’s president of regulatory policy, said in a statement.
Charles Prince, the new chairman and chief executive of Citigroup’s global corporate and investment bank, which includes Salomon, emphasized in a letter to employees that the firm was not admitting wrongdoing but instead moving quickly to resolve the inquiry. “We are determined to take a leadership position in establishing higher standards for Wall Street research,” Prince wrote. “We are continuing to review our policies and procedures and, in the near future, we will announce some additional changes to ensure that the quality and integrity of [Salomon] research consistently leads the industry.”
Grubman’s attorney, Lee Richards, said the charges filed against Grubman have no basis. “Mr. Grubman’s coverage of Winstar reflected his honestly held views and was more than reasonably based on what was known about Winstar at the time of the coverage in question,” Richards said in a statement. Grubman was pushed out of Salomon in August with a $30 million severance package.
Robert Romano, an attorney for Gochuico, 33, said his client was on maternity leave but would vigorously contest the charges when she returns. “Ms. Gochuico is a highly educated, hardworking and honest professional whose conduct has been grossly mischaracterized in this complaint,” Romano said. “My client is innocent. . . . There is nothing in the e-mails [obtained by the NASD] that is at odds with the firm’s public research.”
Romano said the NASD took several e-mails Gochuico wrote, including one to her sister in which she appeared to recommend selling Winstar at around $20, out of context.
Michael Mayo, who covers Citigroup for Prudential Securities, said the amount of the fine was insignificant for such an enormous bank but that the narrow settlement would do little to clear away issues dragging on the company’s stock. “The predatory lending settlement equaled about three days’ worth of earnings for Citigroup,” Mayo said, referring to the bank’s agreement last week to pay $215 million to settle charges that it pressured consumers into buying unnecessary loan insurance. “This represents about 30 minutes worth of earnings. But it’s also just the tip of the iceberg.”
In addition to possible research conflicts, regulators and prosecutors have been looking into whether Salomon awarded hard-to-get shares in hot initial public offerings to executives at firms that were also lucrative banking clients.
New York Attorney General Eliot Spitzer is conducting one of the most aggressive inquiries into Salomon. Sources close to the probe say the attorney general could take action within days regarding Salomon’s IPO allocations and then will present a larger case on allegedly tainted research.
In an interview, Schapiro said Salomon’s reports on Winstar should have discussed the serious risks facing the company, including funding levels and the threat of bankruptcy. She also said internal e-mails indicate officials at the firm had a low private opinion of Winstar. In one e-mail, a Salomon analyst called the $50 target price “shall we say extremely aggressive.”
Schapiro said Salomon was privately telling clients to sell Winstar shares at well below $50 even while Grubman used his reports to belittle analysts who were critical of the company.