Salomon Smith Barney

Jack Grubman, Smith Barney's former telecom stock analyst, resigned from his position in August 2002, due to professional and personal hardship brought on by investigations into his stock ratings. Grubman maintains that he acted in line with fair dealing standards and published ratings he believed to be accurate. His ratings had a history of being highly respected and trusted by investors. However, as telecom stock values fell, his bullish ratings were accepted with growing hesitation. By the time Grubman lowered his ratings of nearly worthless stocks from "buy" to "neutral," investors had lost millions. In one telling example, Global Crossing, which was rated at "buy" until October of 2001, went bankrupt only four months later (January, 2002). Grubman's ratings of WorldCom also remained high during the telecom bust and were not dropped until March of 2002, just months before the company's collapse. In April of 2003 Grubman was fined $15 million and barred from serving in the securities industry by the SEC and other regulators.

Client Bias

It is standard procedure for investment bankers to create the best deals possible for their clients and potential clients, especially since corporate investment banking is a huge source of company revenue. Problems arise, however, when analysts are involved in this 'wooing' process. The undisclosed influence of investment banking on analysts violates fair dealing standards. Grubman's high level of involvement with Smith Barney's investment banking clients calls the reliability of his ratings into question. Smith Barney is noted for having kept nearly all of its ratings between neutral, outperform, and buy, and rarely at the level of underperform and sell. Smith Barney's investment banking operations have also been scrutinized by Spitzer. The company gave lucrative initial public offering (IPO) investment opportunities to CEOs and ranking directors of corporations that were investment banking clients.

Initial Public Offering

The term 'initial public offering,' refers to the first time shares of a company are made available to investors. Investment banks act as underwriters in IPOs by bringing companies public and selling their stock. Underwriting is a large source of income for investment brokerages.

Key Banking Clients with Salomon Smith Barney

WorldCom

Questionable interactions with WorldCom:

• In October of 1997, Grubman acted as a proxy solicitor for WorldCom as it worked to purchase MCI communications. (A proxy solicitor seeks out the votes of proxy shareholders in order to move forward approval for a corporate purchase, merger, or other large agreement.)
• Grubman rated WorldCom highly until March of 2002. WorldCom's fraud was uncovered in June of the same year, and it went bankrupt in July.
• Through Smith Barney, Bernie Ebbers, the CEO of WorldCom, was given the opportunity to purchase IPO shares that quickly made him millions. One of the IPOs Ebbers took advantage of was Rhythm NetConnections. The value of Rhythm NetConnections' stock rose 200% the first day it was publicly traded.
• Grubman attended three WorldCom board meetings and had a friendly relationship with Ebbers.
• An e-mail was written by Grubman on March 12, 2002 to Ebbers, informing him that WorldCom was being removed from the recommended list by Smith Barney's equity strategist. He wrote, "This is our strategist, not us."
• Grubman sent a $100,000 campaign contribution to the Democratic Senatorial Campaign Committee on June 23, 2002. The check arrived the same day Grubman was subpoenaed to witness in the WorldCom trial.
• None of these activities were illegal or hidden, but collectively they rose skepticism over the legitimacy of Grubman and Smith Barney's claim that they did not advise and act in favor of WorldCom out of a conflict of interest.

Global Crossing

Global Crossing was brought public in 1998 by Smith Barney. The company, which aimed to lay global fiber-optic telecom cables, received frequent advising from Grubman. He advised Global Crossing on its purchase of Frontier Communications, its attempted takeover of US West, and its choice of Robert Annunziata as CEO. Grubman continued to publish ratings on Global Crossing stock, even though he was personally involved in the company. He has faced intense criticism and even lawsuits because he gave the company "buy" ratings, apparently out of a conflict of interest, through nearly the entire length of the its collapse. These "buy" ratings weren't dropped until October of 2001. Shares were valued at one dollar by this time. Global Crossing declared bankruptcy in January of 2002.

Salomon Smith Barney Investment Banking Clients

Investigations are being made into the ratings published by Smith Barney of these companies:

• 24/7 Media
• Adelphia Business Solutions
• Enron
• FLAG Telecom Holdings, Ltd.
• Focal Communications
• Global Crossing
• Level 3 Communication, Inc.
• McLeodUSA, Inc.
• Metromedia Fibre Network International
• Quokka Sports
• Webvan
• Williams Communication Group
• Winstar Communications
• WorldCom
• XO Communications Group
• Smith Barney Settlement

Smith Barney settled with regulators of the securities industry in April of 2003. The firm agreed to pay $400 million (double what Credit Suisse First Boston and Merrill Lynch were required to pay).