Grubman May Agree to Fine of $15 Million
Jack Grubman, the former Salomon Smith Barney stock analyst whose rosy recommendations helped Global Crossing Ltd. and WorldCom Inc. become telecommunications giants before they collapsed, tentatively agreed Friday to pay a $15-million fine and be barred for life from the securities industry.
Grubman, who flaunted his close ties to the chairmen of Global Crossing and WorldCom, resigned in August amid widespread criticism for going beyond the traditional analyst function of simply evaluating companies. He also helped broker lucrative investment banking deals for Salomon.
Such conflicts came under scrutiny after the downfall of the telecommunications giants this year, and securities houses now are keeping their researchers out of investment banking operations. In January, Global Crossing became the largest telecom company to file for Chapter 11 bankruptcy reorganization. WorldCom eclipsed that in July, becoming the biggest corporate bankruptcy in terms of assets.
Grubman, who received a $13.2-million severance package when he left Salomon, agreed in principle to the deal, whose terms were still being finalized.
The settlement was part of an agreement announced Friday between state and federal regulators and Wall Street’s leading brokerage firms. Salomon parent Citigroup Inc. and other firms agreed to pay a total of $1.4 billion to settle claims they misled investors with biased stock research. Citigroup will pay $400 million, the largest amount.
Grubman “simply will not be permitted to go back to the securities business,” said New York Atty. Gen. Eliot Spitzer.
Spitzer said Citigroup Chairman Sanford Weill would not be prosecuted for his role in asking Grubman to consider upgrading a rating on AT&T; Corp., allegedly to help Citigroup win AT&T;’s banking business. Weill has denied any wrongdoing.
Grubman was once Wall Street’s highest-paid researcher, at $20 million a year, and an enthusiastic backer of telecoms. He kept “buy” ratings on Global Crossing and WorldCom long after they hit the skids and their share prices eroded.
At the same time, Grubman maintained regular contact with Bernard J. Ebbers, then WorldCom’s chairman, even attending board meetings. Grubman also built such strong ties with Global Crossing Chairman Gary Winnick that Salomon had a role in most every Global merger, acquisition and bond offering, as well as the company’s initial public stock offering.
The analyst and Winnick, a Los Angeles financier, grew so tight that at a dinner at Claridge’s Hotel in London, Winnick seated Grubman with him at the lead table, along with then- Defense Secretary William S. Cohen and former British Prime Minister Margaret Thatcher.
In congressional testimony this year, Grubman expressed remorse for maintaining his positive outlook as WorldCom and other telecom firms crumbled under massive debts and an excess of fiber-optic capac- ity.
“I regret that I was wrong in rating WorldCom highly for too long,” he said.
Grubman contended that he became better informed by attending three WorldCom board meetings and by analyzing the company’s financial data days before the general public could.
