[A-List] US legitimation crisis: Salomon Smith Barney

["Keaney Michael" <Michael.Keaney@xxxxxx>]

The whores of Wall Street

Just when you thought the Dome was slipping into history, its buyer is
cast among the villains in a US shares scandal

David Teather in New York
Wednesday October 2, 2002
The Guardian

Jack Grubman has been cast as the villain of Wall Street, a role
befitting a man with a name that could have been lifted straight from
the pages of a grim Charles Dickens novel. In a lawsuit filed on Monday,
the New York state attorney-general Eliot Spitzer assailed the former
star telecoms analyst at Salomon Smith Barney with blood curdling
allegations.

The suit, though not naming Mr Grubman as a defendant, detailed alleged
conflicts of interest at the brokerage that Mr Spitzer said enriched a
few at the expense of many. In one email, Mr Grubman admitted the bank
supported "pigs" in supposedly objective research notes to ensure they
granted Salomon investment banking business.

The suit quotes former colleagues describing Mr Grubman as an
"overpriced cheerleader" and an "investment bank whore". Allowing him to
"represent himself as an analyst is an egregious act by the management
of this firm" said another.

Although Mr Grubman has become the lightning rod for the attacks on Wall
Street, he is far from being the only one facing allegations of
corruption. Mr Spitzer, who has extracted a $100m settlement from
Merrill Lynch for conflicts of interest, warned that he was training his
sights on other analysts and other Wall Street firms. The suit against
Merrill contained similar compelling evidence including an e-mail from
one-time star in ternet analyst, Henry Blodget, describing stocks as a
"piece of shit" while recommending them to small investors.

Civil suits have been filed by investors against banks for poor or
conflicted advice, and investigators from Congress, the securities and
exchange commission and other regulators are poring over the industry.
The US justice department is also investigating Wall Street practices,
raising the prospect of criminal charges. Banks are also under scrutiny
for their willingness to engage in the aggressive balance sheet
management that brought down Enron, WorldCom and Global Crossing.

Almost 100 Merrill Lynch employees had investments in the most notorious
of the Enron off-balance sheet entities LJM2, which the bank had
structured. Merrill recently fired two senior executives for refusing to
testify in the Enron hearings in Washington. Three former Greenwich
Natwest bankers have been indicted on Enron-related fraud charges.

The overarching picture is of a banking sector riven with self interest.
Mr Grubman and Mr Blodget have resigned and a handful of others have
been suspended or fired, but the sense is that the clearout has only
just begun. The suit on Monday named five former executives of telecoms
companies whom Mr Spitzer alleged had received allocations of shares in
"hot" initial public offerings during the 1990s from Salomon. The quid
pro quo was to grant investment banking business to the brokerage, the
suit claimed. Among the five is former Qwest Communications chairman
Philip Anschutz, the man behind the Greenwich Dome revamp. In January,
Credit Suisse First Boston agreed a $100m fine to settle similar
allegations.

At the end of January 2001, John Hoffman, head of global equity research
management at Salomon, acknowledged internally that the bank's ratings
were "ridiculous". Out of 1,179 stock ratings at the time, there were no
"sell" recommendations and only one "underperform".

In another internal email, Mr Grubman said to the head of research:
"Most of our banking clients are going to zero and you know I wanted to
downgrade them months ago but got a huge push from banking. I wonder
what use bankers are if all they can depend on to get business is
analysts who recommend their business clients." Of the 36 companies he
covered, 16 went bankrupt but he never issued a single "sell"
recommendation.

An indictment against former Tyco executives claimed they forced out a
Merrill analyst who published a bearish research note. Former analysts
from Merrill and UBS Paine Webber now claim they were fired for
criticising Enron.

Salomon, owned by Citigroup, hopes to reach a universal settlement with
all of the outstanding investigations. Former chief executive Michael
Carpenter was ousted in a move designed to signal that the bank wanted a
fresh start. The sheer weight of allegations could make that difficult.
The bank has agreed a $5m settlement with the National Association of
Securities Dealers over claims its research notes on the bankrupt
broadband company Winstar were overly bullish. The NASD also filed
charges against Mr Grubman that could lead to his suspension from the
industry.

The wave of suits also exposes the banks to a deluge of actions from
shareholders. Last year Merrill Lynch paid $10m to settle claims from a
private investor that he had received wrongful advice from Mr Blodget.
That same lawyer is now suing Salomon over advice given by Mr Grubman
and said he had been contacted by many clients seeking redress against
Mary Meeker, the Morgan Stanley analyst dubbed the "queen of the
internet". In the coming weeks Judge Melinda Harmon in Houston will
decide whether a $30bn class action against nine banks and associated
law firms and accountants implicated in the Enron scandal can proceed.

In his resignation letter Mr Grubman said he felt he had been unfairly
singled out. Tellingly, he suggested he was only doing what everyone
else was doing. "I did my work as an analyst within a widely understood
framework consistent with industry practice that is now being
extensively second-guessed." If that's the case, there is likely to be a
lot more trouble ahead.