The National Association of Securities Dealers fined Citigroup Inc.’s Salomon Smith Barney $5 million for issuing misleading research reports in 2001 on Winstar Communications Inc.
Separately, the NASD filed a complaint against Jack Grubman, formerly the managing director of the firm’s equity research department, and Christine Gochuico, a Salomon vice president and an assistant to Mr. Grubman.
Mr. Grubman and Ms. Gochuico wrote the reports that were the focus of the inquiry.
Monday’s fine, part of a settlement between NASD and Salomon, was the regulator’s third-largest settlement in history. It resolves only the NASD investigation into Salomon’s Winstar reports and doesn’t address other, larger Salomon-related research analyst investigations currently under way by NASD and other regulators.
“What occurred in this case was a serious breach of trust between Salomon and its investors,” said Mary Schapiro, the NASD’s president of regulatory policy and oversight.
Citigroup said it was “pleased” the NASD settled its inquiry into Salomon Smith Barney’s research coverage of Winstar.
The Wall Street Journal reported Friday the NASD was preparing the charges against Mr. Grubman.
The NASD has focused on whether Mr. Grubman misled investors by touting shares of Winstar, one of Salomon’s investment-banking clients, amid evidence that the company was in deep financial trouble, people familiar with the matter say. Mr. Grubman had been a vociferous bull on the stock for several years, and he continued to support the company in his research even as evidence began to emerge in early 2001 about Winstar’s financial problems.
The NASD action marks the first major case by federal securities regulators investigating whether big securities firms obtained investment-banking business by making overly optimistic stock picks. Charles Prince, Salomon Smith Barney’s new chief executive, met Thursday with Ms. Schapiro to discuss the Winstar case, people familiar with the meeting said.
Citigroup and its Salomon Smith Barney unit are aggressively seeking to put a number of regulatory woes behind them.
Citigroup, the nation’s largest financial-services firm, agreed Thursday to pay $215 million to settle federal charges that a company it acquired manipulated as many as two million people into buying overpriced mortgages and credit insurance before the Citigroup purchase. And Mr. Prince, in his first major initiative as Salomon’s chief, has been attempting to reach an overall settlement with regulators and prosecutors examining a number of alleged abuses that have dogged the firm for months.
Meanwhile, Mr. Prince said in an internal memo Monday to employees about the $ 5 million fine that Salomon expects to announce more changes within its equity- research operations. He added he wasn’t at liberty to discuss the details of the matter further because of ongoing litigation.
A spokesman for New York State Attorney General Eliot Spitzer said the NASD settlement “was an affirmative step,” but that its own investigation into Salomon’s research practices is ongoing. Mr. Spitzer, along with other regulators, is conducting a broader inquiry into Salomon’s banking and research practices.