Securities analyst Jack Grubman, under fire for promoting WorldCom stock while his investment firm did business for the company, is being targeted for enforcement action by a brokers’ self-policing group for his bullish advice on another bankrupt telecom company.
The disciplinary arm of the National Association of Securities Dealers has told Grubman, one of Wall Street’s most influential analysts, that it was poised to allege that he violated rules in his recommendations for Winstar Communications Inc. Winstar, operator of a wireless network providing high-speed Internet access to office buildings, filed for bankruptcy protection in April 2001 with some $5 billion in debt.
NASD Regulation also is preparing to take enforcement action against Grubman’s firm, Salomon Smith Barney, a source familiar with the matter said Monday, speaking on condition of anonymity and confirming a report in The Wall Street Journal. A variety of sanctions are being considered against Grubman and the firm, one of Wall Street’s biggest, including large civil fines and even exclusion from the securities industry, the source said.
The U.S. attorney in Manhattan also is investigating stock research at Salomon Smith Barney, including the work of Grubman and other analysts, The Journal reported on its Web site Monday, citing unidentified people close to the firm.
Susan Thomson, a spokeswoman for New York-based Salomon Smith Barney, part of financial services company Citigroup Inc., said only, “We’re cooperating fully with all inquiries.”
Herb Haddad, a spokesman for the U.S. attorney’s office, would not comment.
Earlier, Salomon Smith Barney refused to comment directly on the possibility of NASD action against it.
“As always, we cooperate fully with any inquiry,” the firm said in a statement. “Mr. Grubman’s calls on Winstar were part of a consistent and reasonable investment thesis developed and held in good faith for many years. There was certainly no intent to mislead investors.”
“Mr. Grubman continues to be an active member of the firm’s research team,” the statement said.
Shares of Citigroup fell 11 percent on the news, dropping $3.96 to close at $32.04 on the New York Stock Exchange.
The planned enforcement moves come as the NASD, the Securities and Exchange Commission, New York state attorney general Eliot Spitzer and state securities regulators have been investigating alleged conflicts of interest among analysts at several big Wall Street firms.
In a settlement with Spitzer’s office, Merrill Lynch & Co., the nation’s largest brokerage firm, agreed in May to pay a $100 million fine and to separate its analysts from its lucrative investment-banking business to avoid future conflicts of interest.
NASD Regulation “has informed Mr. Grubman that he is the subject of an investigation relating to research coverage of Winstar Communications Inc. and that the enforcement staff has made a preliminary determination that violations have occurred,” says the broker record for Grubman maintained by the group. A copy of the record was obtained by The Associated Press.
“Mr. Grubman denies having engaged in any such violation,” the broker record notes.
The records cover individuals but not firms.
Grubman was harshly criticized by lawmakers of both parties when he testified at a House hearing earlier this month with senior executives of WorldCom.
The analyst said he wrongly rated WorldCom highly for too long, but insisted he did not know of the stunning $4 billion earnings misstatement before downgrading his recommendation for the stock on June 21.
Grubman — one of Wall Street’s highest-paid executives, earning about $20 million a year — was chummy with WorldCom founder and former chief executive Bernard Ebbers and admitted during the hearing to attending “maybe three” WorldCom board meetings over the years.
Grubman issued favorable recommendations for Winstar stock up until its bankruptcy filing. Winstar shares gradually fell from $17 in January 2001 to 14 cents on April 17, 2001, the day before the filing in federal bankruptcy court.
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