Salomon Smith Barney agreed to pay a $5 million fine Monday to settle charges it issued misleading research reports from controversial analyst Jack Grubman.
The penalty was levied against the Citigroup Inc. investment banking division by the National Association of Securities Dealers.
In a related matter, NASD filed a complaint against star telecommunications analyst Grubman and his assistant, Christine Gochuico, for writing the re-ports.
NASD determined that Salomon Smith Barney’s reports on Winstar failed to adequately disclose the risks of investing in the broadband telecommunications service provider, which filed for bankruptcy protection last year. The reports consistently praised Winstar and belittled other analysts who were critical of the company.
Grubman drew similar criticism for his support of Clinton-based WorldCom. He maintained a “buy” rating on that stock until a few days before it announced it boosted earnings by $3.85 billion, a figure that has since grown to $7.2 billion.
The complaint against Grubman and Gochuico charges that e-mails and other internal Salomon documents showed they publicly recommended Winstar to investors but expressed contrary views in private.
“What occurred in this case was a serious breach of trust between Salomon and its investors,” said Mary L. Schapiro, NASD president of regulatory policy and oversight.
Salomon agreed to the fine without admitting or denying the findings.
Lawyers for Grubman and Gochuico did not immediately return calls for comment.
Citigroup said it worked with the NASD to settle the matter and is pleased with the outcome.
Wall Street analysts have been under fire for much of this year, accused of pandering to companies with their stock recommendations in return for lucrative investment banking fees for arranging mergers and stock offerings.
Merrill Lynch & Co. earlier this year agreed to pay a $100 million fine after investigators for New York’s attorney general uncovered e-mails from that firm’s analysts privately disparaging companies they touted to the public.
Grubman was one of the most influential stock analysts and power brokers of the technology boom. He left Salomon in August amid investigations into his alleged conflicts of interest in touting the stocks of WorldCom, Global Crossing and other failed telecommunications companies.
A congressional committee is investigating Salomon and Grubman, and he has been targeted by at least 46 consumer complaints and lawsuits, many of them related to the WorldCom collapse.
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