Jack Grubman, an avid boxing fan, is taking it on the chin. Accounting scandals at MCI WorldCom, Qwest and Global Crossing are falling like blows on his reputation as Wall Street’s premier telecommunications analyst.
Grubman earned that title during the 1990s, when he advised MCI WorldCom in its bid for Sprint, SBC Communications in the acquisition of Ameritech, and Global Crossing in its purchase of Frontier Communications. Grubman could catapult careers, as he did when he recommended Joseph Nacchio for the chief executive’s suite at Qwest and Robert Annunziata for the CEO spot at Global Crossing.
Grubman hobnobbed with all the telecom stars and bragged about attending the 1999 wedding of Bernard Ebbers, who resigned as WorldCom CEO in April.
Today, Grubman is under fire from investors who claim his close ties to clients colored his stock recommendations. And his recommendations are a prime target of a sweeping investigation by New York Attorney General Eliot Spitzer.
Grubman kept his ”buy” rating on WorldCom shares until April, despite the fact that the company’s stock had already fallen 92% from its peak in June 1999.
Friday, Grubman cut his rating on WorldCom to ”underperform” from ”neutral” — sending shares down 25% — just days before the company revealed $3.9 billion in accounting irregularities.
This isn’t the first time Grubman has pulled the plug on the eve of a meltdown. In April 2001, Grubman downgraded Winstar the day before the telecom company filed for bankruptcy court protection.
Grubman declined to be interviewed, but as he was trailed Wednesday morning from his apartment in Manhattan by a reporter from the CNBC financial network, Grubman said, ”Nobody saw this coming. I am no different than anybody else on Wall Street.” A clearly agitated Grubman also said the timing of his downgrade was ”pure coincidence.”
New York’s attorney general is looking into the role of analysts’ recommendations on WorldCom stock’s stunning rise. And Wednesday, Spitzer said, ”It did catch many people’s eye that (Grubman) did finally come out with a downgrade.”
But Grubman was not alone, or the last to downgrade WorldCom. Wednesday, James Friedland, an analyst for Robertson Stephens, lowered his rating from a ”strong buy” to a ”market underperform.” Friedland was traveling and could not be reached for comment.
Last month, Merrill Lynch agreed to pay $100 million to settle charges by Spitzer that the company’s Internet analysts, such as Henry Blodget, published biased recommendations on companies that were investment-banking clients. Spitzer also forced Merrill Lynch to break the link between analysts’ pay and their role in investment-banking deals.
Few analysts on Wall Street played both sides of that fence better than Grubman. In May of 2000, he told Business Week, ”I’m sculpting the industry. . . . What used to be a conflict is now a synergy.”
While Salomon Smith Barney, a division of Citigroup, was the first to align its policies to match the Merrill Lynch settlement, Grubman is still in Spitzer’s cross hairs.
In April, Spitzer asked Salomon to provide documents dating to January 1998 on 54 telecommunications companies, all but one of which Grubman covered. Spitzer also has asked for notes of conversations between Salomon employees and representatives of telecom companies, drafts and final versions of research reports, and copies of presentations used to attract investment-banking business.
”We are cooperating fully with his investigation,” says Arda Nazerian, a Salomon spokeswoman.