Analyst Tipped WorldCom, Committee Says
Salomon Smith Barney telecom analyst Jack Grubman warned top WorldCom Inc. executives that investment strategists at his firm were dropping the company from the brokerage’s recommended list before the information was publicly released, the House Financial Services Committee said Tuesday.
Grubman, who recently left the brokerage under a cloud of controversy because of his ties to WorldCom, also appeared to distance himself from his firm’s strategists in an e-mail to WorldCom’s then-chief financial officer, Scott D. Sullivan, who forwarded the e-mail to then-Chief Executive Bernard J. Ebbers.
“This is our strategist, not us. Which is why I hate ever having a name on that list,” Grubman said in the March 12 e-mail to Sullivan.
That day, Salomon removed WorldCom from the brokerage’s official recommended list, even though Grubman continued with a high rating on the shares.
Salomon’s decision followed WorldCom’s announcement on March 11 that the Securities and Exchange Commission had requested information on the firm’s accounting procedures. WorldCom shares slumped 12% to $7.93 on March 12.
Grubman is under investigation by securities regulators and the New York attorney general for possible conflicts of interest in his positive ratings of telecommunications companies that were struggling financially.
“Grubman is distancing himself from somebody else in his own company that clearly made the right call,” said Peggy Peterson, a spokeswoman for the Financial Services Committee.
A lawyer for Grubman was not immediately available for comment. The practice of informing a company about a rating change was appropriate, a Salomon spokeswoman said.
Additional e-mails released by the panel showed top WorldCom executives trying to downplay the company’s plight in spring, including rejecting the notion that bankruptcy was an option, less than two months before the company sought protection from creditors.
“Overall, what all this has in common is it shows how Ebbers, Sullivan and Grubman dealt with questions about WorldCom; they obfuscated every time,” Peterson said.
WorldCom admitted in June that it had improperly accounted for $3.9 billion in expenses and in July filed for the largest bankruptcy in history. In early August, the firm said it improperly accounted for an additional $3.3 billion.
Sullivan was indicted on criminal fraud charges and is slated to be arraigned today in New York along with WorldCom’s former director of general accounting, Buford Yates.
Former WorldCom Controller David Myers, who resigned after the accounting debacle emerged in June, is trying to reach a plea agreement with prosecutors.
On Tuesday, federal prosecutors received a 30-day extension to continue plea discussions with Myers, who is charged with helping Sullivan, his former boss, hide operating expenses.
Prosecutors have filed court papers signaling that Myers and two other WorldCom employees are preparing to plead guilty and cooperate against their bosses.
