Citigroup will pay $5 million to settle NASD charges that former analyst Jack Grubman misled investors by recommending Winstar Communications as the telecommunications company was sliding into bankruptcy.
The settlement covers only Winstar-related charges against the bank’s Salomon Smith Barney brokerage unit and doesn’t resolve other allegations by the National Association of Securities Dealers, a selfpolicing brokers’ group.
The NASD also charged Grubman and an assistant, Christine Gochuico, who are both contesting the allegations, the group said.
Citigroup Chairman Sanford Weill is moving to settle investigations by lawmakers, regulators and state prosecutors into conflicts of interest between its investment banking and research that have led to a 41 percent drop in Citigroup shares this year.
The world’s largest financial-services company earned about $24 million helping Winstar raise money before the latter’s collapse last year, as its researchers were issuing favorable research reports, the NASD said.
“It’s a good sign that he’s getting these things cleared up quickly,” said Jessica Caie, portfolio manager at Cohen, Klingenstein & Marks, which manages 2.5 million Citigroup shares. “I just hope that he doesn’t pay too much.”
Weill ousted Salomon’s chairman this month and put in place Citigroup lawyer Charles Prince to lead the efforts. Last week Citigroup agreed to pay $240 million to settle separate accusations that the bank’s consumer-finance unit used deceptive practices to sell home-loan insurance.
In addition to the NASD, the Securities and Exchange Commission, Justice Department and New York Attorney General’s Office are investigating the bank’s stock research.
Attorneys for Grubman didn’t respond to phone calls requesting comment. Gochuico’s lawyer, Robert Romano, said the 33-year-old associate is not guilty of the charges.
The NASD said Grubman and Gochuico, while recommending Winstar’s stock, privately sent e-mail that “highlighted risks of investing in Winstar and expressed doubts about Winstar’s ability to obtain funds.”
Grubman and Gochuico consulted Winstar executives before issuing their research reports, which were supposed to reflect the analysts’ independent judgment, the charges said.
“What occurred in this case was a serious breach of trust between Salomon and its investors,” said Mary Schapiro, head of the NASD’s regulatory arm. “It should go without saying that reports issued for investors’ use must be truthful.”
The investigations are looking at whether Citigroup and rival Wall Street firms tried to win investment-banking business by hyping stock research and giving corporate insiders shares of initial public offerings. Analysts’ research is supposed to represent the firms’ independent judgment for investors, the NASD said.
Darren Dopp, spokesman for the New York attorney general, said the NASD announcement is “a positive step, but more needs to be done.”
“This reinforces the need for a structural remedy,” he said. “It’s hard to imagine this was an isolated incident.”
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