The Nasdaq stock market’s regulatory body fined Citigroup investment banking arm Salomon Smith Barney $5 million on Monday, saying former analysts betrayed the trust of investors by promoting stocks to their clients while disparaging them in internal communications.
The regulatory body said the case, along with other pending investigations, should make clear to investors and Wall Street firms alike that strong action will be taken against analysts and firms issuing misleading research.
The fine, the third largest in NASD history, was related to a series of research reports in 2001 on bankrupt telecommunications firm Winstar authored by ex-Salomon star analyst Jack Grubman.
“Today’s settlement between NASD and Salomon resolves a singular NASD investigation into Salomon’s Winstar reports and does not address other, larger Salomon-related research analyst investigations currently underway by NASD and other regulators,” the NASD said in a press release announcing the fine.
The NASD said Salomon neither admitted nor denied NASD’s findings.
The firm was not immediately available for comment.
Winstar, a New York-based wireless broadband communications firm, filed for bankruptcy in April 2001.
In the research reports in question, Winstar carried Salomon’s top investment rating and a $50 18-month price target despite the fact the stock had fallen to just 17 cents on the day it filed bankruptcy from $20 in January 2001.
In the settlement Salomon agreed it had no reasonable expectation on which to base that price target, the NASD said.
“What occurred in this case was a serious breach of trust between Salomon and its investors,” according to Mary Schapiro, NASD’s President of Regulatory Policy and Oversight.
The NASD said its investigation uncovered details of Salomon and Grubman’s relationship to Winstar, including investment-banking work done for Winstar that generated $24 million in fees.
Investigators said Grubman and assistant Christine Gochuico also provided Winstar with advance copies of their research reports, and the financial models that were their basis, for approval by the firm before publication.
The two analysts went so far as expressing concern among themselves, in e-mail and other communications not made public, that the firm could have trouble raising funds.
“The reports contained repeated strong praise for Winstar, while belittling other analysts who were critical of the company. Some of the rebuttals were false and misleading,” the NASD charged.
In 1998 the analysts began Winstar coverage with a “buy” rating when the firm had a $1 billion market capitalization. They subsequently maintained their rating as the market capitalization rose as high as $2.8 billion, and made no changes as the company’s value fell by more than 99 percent in 2001.
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