Stock Analyst Resigns Under Fire

Jack Grubman, once the most powerful telecommunications analyst on Wall Street, resigned from Salomon Smith Barney late Thursday amid a litany of government probes into whether financial conflicts tainted his stock recommendations.

In what the brokerage called a “mutual agreement,” Grubman resigned after accepting a severance package totaling $13.2 mil- lion.

Grubman gained notoriety first for his early embrace of many new telecom companies that emerged amid the industry’s deregulation in the mid-1990s, and then for his close ties to those companies, including WorldCom Inc. and Global Crossing Ltd.

The analyst remained steadfastly bullish even as the industry collapsed in 2000 and 2001 and many of his telecom stock picks shriveled in value.

As his unusually close relationship with Salomon’s investment banking department came to light in recent months, critics charged that Grubman’s stock recommendations were primarily aimed at pleasing the managements of the subject companies, in the hope of bringing Salomon more fee-generating underwriting business.

In his resignation letter, Grubman took equal turns defending his work and lashing out at critics.

“I always wrote what I believed,” Grubman said, adding, “I performed my work consistently with all laws and standards of ethics.”

However, he said he was being unfairly targeted by a “relentless series of negative statements about my work.”

In a statement to employees, Salomon Chairman Michael A. Carpenter said he agreed that “recent events” made it tough for Grubman to continue in his position.

Grubman, 48, rose to power by going beyond the traditional analyst function of simply evaluating companies to helping broker investment banking deals. Companies wanted coverage from the high-profile analyst, and Grubman was expert in leveraging that into behind-the-scenes merger advice and stock and bond underwriting work for Salomon.

But stock analysts have come under withering criticism as their ties to their firms’ investment banking departments have been exposed against the backdrop of the worst stock market plunge in a generation.

Several regulatory and law enforcement agencies are investigating Grubman for potential civil or criminal wrongdoing, including New York State Atty. Gen. Eliot Spitzer, the National Assn. of Securities Dealers and the U.S. attorney’s office in Manhattan.

In April, Spitzer released a series of embarrassing e-mails in which Merrill Lynch & Co. analysts disparaged stocks privately even while recommending them publicly to investors.

Merrill settled Spitzer’s case by paying $100 million and agreeing to reform how its analysts conduct themselves. The reforms have since been embraced by other major brokerages as Wall Street struggles to restore its credibility with investors, particularly individuals.

At a congressional hearing last month, Grubman was questioned about his ties to WorldCom and queried about why he did not warn investors about the now-bankrupt company’s escalating troubles.

Grubman expressed remorse for maintaining his positive outlook as WorldCom, and the telecom industry in general, crumbled under massive debts. “I regret that I was wrong in rating WorldCom highly for too long,” he told members of the House Financial Services Committee.

But Grubman has not apologized for maintaining close ties to managers of the companies he covered.

The fact that he was able to attend three WorldCom board meetings and analyze the company’s financial data days before the general public made him more informed than his competition, he has said. It is highly unusual for brokerage analysts to enjoy that kind of access to companies.

Grubman told the congressional panel that even with his unusual access, he had no idea that WorldCom had improperly accounted for billions of dollars in expenses and was in such dire financial condition.

Another reason the spotlight shined brightest on Grubman was that he acknowledged earning $20 million a year in recent years--exorbitant even by Wall Street standards.

For Salomon, the underwriting and merger-advisory work it performed for telecom companies earned it hundreds of millions of dollars in fees in the 1990s.

“Jack’s going to take the fall for the analysts,” said one longtime telecom analyst who requested anonymity. “Arthur Andersen’s taking the fall for accountants, and someone’s got to take the fall for the attorneys.”

Some experts speculated that Salomon was anxious to get rid of Grubman in an attempt to extricate itself from a legal and public relations drubbing.

“I suspect no one at Salomon believes he is an asset to the firm,” said John Coffee, a Columbia University securities law professor. “As long as Salomon was holding onto Grubman and they were defending his behavior, they were going to have trouble taking the high ground.”

Grubman’s troubles placed more pressure on Citigroup Inc., Salomon’s parent. Citigroup Chairman Sanford Weill, long considered one of Wall Street’s most respected leaders, has been aggressively trying to rebuild the firm’s image in the wake of its high-profile involvement in several major controversies over the last year, including the financing of Enron Corp.

Citigroup was a lender to the collapsed energy trader and has been accused of helping it hide debt to mask its financial position.

The 69-year-old Weill, in a letter to Citigroup employees in late July, said he regretted “the pain that has been caused” by the bank’s business with Enron, but he insisted that the bank abided by all legal requirements in structuring transactions with Enron.

Interviewed about Grubman by the Wall Street Journal in July, Weill was asked if he thought Grubman had a future with Salomon. Weill didn’t address the question directly, but said: “Jack is a smart person, but he was definitely wrong [on certain stock recommendations]. In retrospect you might say he stayed too long in those positions, but I think he believed what he was doing.”

Grubman was an unlikely Wall Street star. He grew up in a blue-collar neighborhood in northeast Philadelphia, where his father worked for the city and his mother worked in a dress shop. In his youth, he earned money busing tables, selling beach umbrellas and loading packages.

Grubman, a trained mathematician who once worked at AT&T; Corp., stood out among industry watchers by predicting that the new generation of small telecom upstarts would grow faster and operate more efficiently than the AT&Ts; of the world. After he jumped to Salomon Bros. in 1994, widespread industry deregulation helped lend credibility to his view.

At Salomon, Grubman’s role expanded from analyst to advisor. Among his biggest clients were WorldCom and Global Crossing, two telecom upstarts with bold visions for growth and huge appetites for deals that ended up filing the two largest bankruptcy cases in the industry’s history.