Jack Grubman has been cast as the villain of Wall Street, a role befitting a man with a name that could have been lifted straight from the pages of a grim Charles Dickens novel. In a lawsuit filed on Monday, the New York state attorney-general Eliot Spitzer assailed the former star telecoms analyst at Salomon Smith Barney with blood curdling allegations.
The suit, though not naming Mr Grubman as a defendant, detailed alleged conflicts of interest at the brokerage that Mr Spitzer said enriched a few at the expense of many. In one email, Mr Grubman admitted the bank supported “pigs” in supposedly objective research notes to ensure they granted Salomon investment banking business.
The suit quotes former colleagues describing Mr Grubman as an “overpriced cheerleader” and an “investment bank whore”. Allowing him to “represent himself as an analyst is an egregious act by the management of this firm” said another.
Although Mr Grubman has become the lightning rod for the attacks on Wall Street, he is far from being the only one facing allegations of corruption. Mr Spitzer, who has extracted a $100m settlement from Merrill Lynch for conflicts of interest, warned that he was training his sights on other analysts and other Wall Street firms. The suit against Merrill contained similar compelling evidence including an e-mail from one-time star in ternet analyst, Henry Blodget, describing stocks as a “piece of shit” while recommending them to small investors.
Civil suits have been filed by investors against banks for poor or conflicted advice, and investigators from Congress, the securities and exchange commission and other regulators are poring over the industry. The US justice department is also investigating Wall Street practices, raising the prospect of criminal charges. Banks are also under scrutiny for their willingness to engage in the aggressive balance sheet management that brought down Enron, WorldCom and Global Crossing.
Almost 100 Merrill Lynch employees had investments in the most notorious of the Enron off-balance sheet entities LJM2, which the bank had structured. Merrill recently fired two senior executives for refusing to testify in the Enron hearings in Washington. Three former Greenwich Natwest bankers have been indicted on Enron-related fraud charges.
The overarching picture is of a banking sector riven with self interest. Mr Grubman and Mr Blodget have resigned and a handful of others have been suspended or fired, but the sense is that the clearout has only just begun. The suit on Monday named five former executives of telecoms companies whom Mr Spitzer alleged had received allocations of shares in “hot” initial public offerings during the 1990s from Salomon. The quid pro quo was to grant investment banking business to the brokerage, the suit claimed. Among the five is former Qwest Communications chairman Philip Anschutz, the man behind the Greenwich Dome revamp. In January, Credit Suisse First Boston agreed a $100m fine to settle similar allegations.
At the end of January 2001, John Hoffman, head of global equity research management at Salomon, acknowledged internally that the bank’s ratings were “ridiculous”. Out of 1,179 stock ratings at the time, there were no “sell” recommendations and only one “underperform”.
In another internal email, Mr Grubman said to the head of research: “Most of our banking clients are going to zero and you know I wanted to downgrade them months ago but got a huge push from banking. I wonder what use bankers are if all they can depend on to get business is analysts who recommend their business clients.” Of the 36 companies he covered, 16 went bankrupt but he never issued a single “sell” recommendation.
An indictment against former Tyco executives claimed they forced out a Merrill analyst who published a bearish research note. Former analysts from Merrill and UBS Paine Webber now claim they were fired for criticising Enron.
Salomon, owned by Citigroup, hopes to reach a universal settlement with all of the outstanding investigations. Former chief executive Michael Carpenter was ousted in a move designed to signal that the bank wanted a fresh start. The sheer weight of allegations could make that difficult. The bank has agreed a $5m settlement with the National Association of Securities Dealers over claims its research notes on the bankrupt broadband company Winstar were overly bullish. The NASD also filed charges against Mr Grubman that could lead to his suspension from the industry.
The wave of suits also exposes the banks to a deluge of actions from shareholders. Last year Merrill Lynch paid $10m to settle claims from a private investor that he had received wrongful advice from Mr Blodget. That same lawyer is now suing Salomon over advice given by Mr Grubman and said he had been contacted by many clients seeking redress against Mary Meeker, the Morgan Stanley analyst dubbed the “queen of the internet”. In the coming weeks Judge Melinda Harmon in Houston will decide whether a $30bn class action against nine banks and associated law firms and accountants implicated in the Enron scandal can proceed.
In his resignation letter Mr Grubman said he felt he had been unfairly singled out. Tellingly, he suggested he was only doing what everyone else was doing. “I did my work as an analyst within a widely understood framework consistent with industry practice that is now being extensively second-guessed.” If that’s the case, there is likely to be a lot more trouble ahead.
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