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The many extracts on these
pages are from copyright material. they are owned by the reference
given or its owner. They are reproduced here for educational purposes
and to stimulate public debate about the provision of health and aged
care. I consider this to be "fair use" in the common interest. They
should not be reproduced for commercial purposes. The material is
selective and I have not included denials and explanations. I am not
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and extent of any allegations made.
The Dotcom and Technology
Bubbles
Market Analysts and Fraud
Smith Barney
More
than numbers on a page, your wealth is the sum of your life's
work. It's hours of toil and a determination to succeed. You've
earned it bit by bit, year by year. And like your trust, we take
it very seriously.
At Smith Barney
success isn't just about meeting a number.
It's about
meeting a standard of performance - yours.
-----------------------------------------
Smith Barney is a division and service mark of Citigroup Global
Markets Inc. and its affiliates and is used and registered
throughout the world. FROM
A CITIGROUP WEB PAGE November
2003
William
Galvin, the attorney general of Massachusetts and the state's
chief securities regulator, said that the investigation of
brokerage firms had shed light on dubious practices. "We're
pulling back the curtain on Wall Street," he said. "The evidence
that is beginning to emerge suggests that the brokerage industry
in general has had a very reckless attitude toward investors. The
pattern seems to be one of bad faith, where brokers and brokerage
firms are almost laughing at the investing
public."
Regulators Find More Red
Flags In Another Analyst's Optimism The New York Times
September 12, 2002
This page examines the conflicts of interest
and the close links between market analysts and bankers. These
resulted in dishonest positive reports which brought in business for
banks but fueled the technology bubble and defrauded investors who
lost trillions of dollars. It was at the heart of the 21st century
fraud scandals.
CONTENTS
Guilty or Not
Guilty
The matters described on these pages are
based on the many press reports and I believe are a reasonable
interpretation of that material. It is not claimed that all or every
allegation made is correct or was proven. In fact large corporations
including Citigroup have routinely denied any wrongdoing.
In
settling the cases, the firms neither admitted nor denied the
allegations, following the standard practice in resolving such
disputes with the commission. WALL
STREET SETTLEMENT: THE OVERVIEW; 10 WALL ST. FIRMS REACH
SETTLEMENT IN ANALYST INQUIRY The New York Times April 29,
2003
The large settlements they have made contain
clauses which allow them to deny the allegations which they are
settling and claim that they have not been guilty of any wrong doing.
One of the major stumbling blocks in the US $1.4 billion settlement
was the use of the word fraud. In the end Spitzer insisted on using
it for the three worst offenders including Citigroup.
You should assume that every adverse matter
described has been denied, or else justified in some way. My interest
is not the legality of what did or did not happen but the morality.
The reports reflect the sort of things which were clearly happening.
I am not asserting the validity of every instance. I have worked on
the basis that with so much smoke there must be a forest fire which
is totally out of control.
Maryellen
Hillery, a spokeswoman for Citigroup, said: "We stand behind the
quality and integrity of our research department and management,
and believe the overwhelming recognition from objective
third-party surveys speaks for itself. The firm strictly adheres
to or surpasses industry and regulatory requirements designed to
foster and preserve the integrity of research. Suggestions to the
contrary made by anonymous sources are baseless and without
integrity." Telecom's
Pied Piper: Whose Side Was He On? The New York Times November
18, 2001
to
contents
The
Role of
Analysts
Salomon Smith Barney
(now renamed Citigroup Global Markets)
Saloman Smith Barney is the investment
banking arm for Citigroup. It is variously referred to on these pages
as Salomon, Smith Barney, or SSB. It has been the prime offender in
the DotCom and technology scandals. Citigroup's other banks played a
lesser role in this but a more prominent part aiding and abetting the
related Enron fraud. What happened was system wide and company wide.
In the majority of these scandals Citigroup was the main offender and
very probably the driving force, paying double the amount in
fines.
Federal,
state and market regulators singled out three of the firms --
Citigroup's Salomon Smith Barney, Merrill Lynch and Credit Suisse
First Boston -- and accused them of outright fraud in issuing
bogus research. A Fraud
by Any Other Name The New York Times May 4, 2003
Except where information elicited about other
investment bankers illustrate the point better I have used Salomon
Smith Barney and their technology analyst Jack Benjamin Grubman as
examples. The same practices occurred in most of the other big banks
but none were quite as aggressive as Citigroup and no one was as
flamboyant as Grubman. Some have even suggested that Grubman alone
was responsible for the entire DotCom and technology bubble but that
would be overstating his influence. He could only do what his company
allowed and supported. He succeeded because they not only allowed it
but because they encouraged him and rewarded him. He was
lionised.
Grubman was part of a business whose members
worked with him. Managers, including the chairman Sandy Weill would
have known of his practices and supported them. Weill personally
dealt with Grubman. He would have seen what Grubman earned and known
why. Grubman simply became the scapegoat.
In addition Citicorp was part of an industry
which supported these practices and admired what Grubman did. Other
companies tried to poach him. He could not have become "top ranking
in his industry on the All-American Research Team" without active
support.
to
contents
The
significance
The DotCom bubble exposed what was happening.
It would be simplistic to suggest that these practices occurred only
there. The investment bankers would have employed these practices in
every area that used the share market to raise money, and taken large
profits from it. These money making practices would quite rapidly
have spread across the USA and then globally.
It was the crisis situation presented by the
DotCom bubble's collapse that exposed the conduct. Even here it was
only imprudent and unwise emails that resulted in their full exposure
and the subsequent fraud settlements. Similar practices elsewhere
would not arouse suspicion, and be very difficult to prove.
to
contents
Relevance to
Health Care
The ups and downs of the health care industry
must have provided excellent pickings for the investment bankers. At
the time of the recurrent health care scandals no one looked.
There have been cycles of boom associated
with scandals, followed by busts in hospital care, psychiatry,
substance abuse, rehabilitation, aged care, step down care, and even
Health Maintenance Organisations. Each went through waves of floats
and consolidation. The DotCom bubble sensitised fraud investigators.
They have now found similar conduct in the HealthSouth
fraud scandal. There is a
separate
page about this.
to
contents
The DotCom
Background
In the Dotcom era many companies were seeking
capital to exploit and develop the technological advances. Those
involved were seeking wealth. Some were not looking too hard at how
they attained it. They readily locked into the Wall Street system
when it served their ends which it willingly did. They had little
choice but to enter the merger spiral if they wanted to avoid being
taken over themselves.
The financiers saw enormous opportunities for
generating business by helping these corporations and by handling the
numerous financial deals - the lucrative floats they used to raise
capital, and the takeovers the banks advised them to mount. The banks
also loaned money for development and expansion. The competition
among financiers was for the pots of gold offered by these and other
growth companies.
There was little risk for the financiers.
Even after companies became bankrupt financiers who had been positive
and loyal to them could continue to advise them and pick up the
bankruptcy business.
According to
NASD, Salomon earned $500,000 advising the company after it had
filed for bankruptcy protection. Winstar shares closed yesterday
at less than a penny.
NASD Sues Star Analyst
Over Research The New York Times September 24, 2002
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contents
The Market
Analysts
Financiers' future business depended on the
success of the initial share floats and other commercial dealings
that funded the technological expansion. If they were not successful
then the business would go to someone else next time. The accountants
and auditors were also caught up in this. If they did not facilitate
and assist the company's activities they lost the business. This was
very big business.
The key to success in the marketplace became
the financial analysts. They analysed the market and reported on the
businesses of the start up companies and their prospects. People,
confused by the complexity of the market bought shares based on their
advice. They were the key to a successful float and to subsequent
mergers.
In the
roaring 90's, most private investors were little guys who perhaps
didn't know stocks but knew their brokers. Or at least they
thought they did.
Last week they
got to know their investment advisers a little better. Ten major
Wall Street investment firms agreed to pay $1.4 billion to settle
conflict-of-interest charges; they would do things like issue
enthusiastic research reports about the same stocks they were
describing as worthless junk in internal e-mail messages.
--------------------------------
Investors like to believe not only that they're smart, but that
financial scandals are isolated blights confined to a single firm
or sector. Alas, the trove of evidence produced during this latest
inquiry points to systemic conflicts of interest in investment
trading, research and banking. The odor coming off these papers
suggests a system that is rotten to the
core. A Fraud by Any
Other Name The New York Times May 4, 2003
To give analysts greater credibility they
were supported by market research departments who crafted their
research and developed models to give the overoptimistic results
needed to make the floats successful.
Complaints
of bias have long dogged analysts. The frenzy of recent years,
when hi-tech analysts used newly minted valuation tools to justify
huge premiums, simply opened up the practice to a wider audience.
"The analysts pumped up this tech bubble and left investors
holding the bag," says Zamansky (lawyer for investors).
The great Mom and Pop
rip-off: Wall Street is entering a firestorm of litigation as
investors round on the analysts who sold them the dot.com boom
The Guardian (London) June 1, 2001
The analysts' independence and integrity was
the cornerstone in the foundations of the marketplace. The investment
bankers who employed the analysts marketed them and promoted their
integrity. Magazines published for investors ranked them so that
investors could choose the most dependable. In practice their reports
often had little to do with the real prospects of the companies they
praised. It had everything to do with the lucrative business which
inflated reports would bring to the bankers.
Until now,
most investors and clients trusted banks - which always placed
great store by their reputations - to manage the potential
conflicts. That trust has now been
eroded.
Wall Street under fire:
daily, complaints grow of unfair treatment and
unethical deals:
Financial Times (London,England) October 4, 2002
- - - - - he (Grubman) was responsible for the
recommendations that many investors followed. Investors do not
rely on advice from investment bankers, they rely on analysts who
have an obligation to publish only their honestly held beliefs.
Citigroup Hurt By Worries
That Inquiry Could Widen The New York Times October 24, 2002
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contents
The Vulnerable
Suckers
It was not only institutional investors
holding the pensions and savings of the country who depended on the
analysts honest and unbiased advice, but the vast bulk of ordinary
investors. This included not only risk takers looking to make their
fortunes but all of the Mom and Pops across the USA seeking to
protect their life's savings from erosion by inflation. These people
were vulnerable and depended on the integrity of the advice they were
given and the research on which it was based. The area was too
complex for the ordinary person.
What happened was an abandonment of integrity
by the market and an enormous abuse of the trust which society placed
in the pillars of the marketplace.
According to
regulators, five of the large firms included in the settlement
paid other firms to issue research on stocks that the big firms
had underwritten to the public. But none of the payments were
disclosed in company documents, so investors did not know that the
additional firms issuing upbeat research had been paid to do
so.
Market Place; Grabbing
for a Patch of Moral High Ground The New York Times April 30,
2003
Most Wall
Street banks reward analysts using client review and banking fees.
Few chart the success of an analyst's recommendations. This means
that high profile analysts such as Blodget, Mary Meeker at Morgan
Stanley and Jack Grubman at Salomon Smith Barney can be rewarded
by winning more business for their
firms.
The great Mom and Pop
rip-off: Wall Street is entering a firestorm of litigation as
investors round on the analysts who sold them the dot.com boom
The Guardian (London) June 1, 2001
In many
cases, the promotion continued right up until the companies either
collapsed or were reduced to penny stocks because of severe
financial difficulties that were played down in the analysts'
research reports.
To critics, much
of the problem with Wall Street research stems from how analysts
have increasingly become tools used by their firms to help secure
lucrative underwriting and investment-banking business.
-------------------------------------------
The
documents showed that some analysts at the firm, in candid
interoffice communications, described as "junk" companies that
Merrill Lynch was publicly recommending.
Last week,
Merrill Lynch agreed to pay $100 million in penalties and change
the way it pays stock analysts
S.E.C. Taking Closer Look
At Wall St The New York Times June 1, 2002
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contents
How the Scam
Worked
Financial institutions made their money in
underwriting and subsequent commission fees for the initial public
offerings (IPOs) they handled. If successful they would become
trusted advisers and a flow on of business occurred. In turn
financial institutions strongly supported the companies who gave them
this ongoing business.
Because the
money you make on I.P.O.'s is so much greater, the increased
pressure from investment banking makes research
dysfunctional."
Clearly, Mr.
Grubman was very good at oiling the pipeline. Besides issuing
securities, many telecom companies -- primed for growth -- were
eager for advice on takeovers or mergers.
Telecom's Pied Piper:
Whose Side Was He On? The New York Times November 18,
2001
He
(Spitzer, NY Attorney General) also said analysts should be
banned from selling banking services to companies that are not yet
public. Assignments to underwrite first-time stock sales, known as
initial public offerings, are among the most lucrative business
for banks and usually lead to future assignments.
"It should be
extended to the I.P.O," Mr. Spitzer said. "It clearly should
be."
Citigroup's Chairman
Urges More Insulation of Analysts The New York Times July 15,
2002
Companies looking for financiers to
underwrite and manage their share offerings selected those bankers
whose financial analysts would give the positive reports needed to
ensure the success of the float. Negative or neutral reports were
consequently bad for business all around. The bizarre story of how
Citigroup secured AT&T's business will be
addressed elsewhere.
Before the
recent scrutiny focused on the conflicts of interest that exist
among Wall Street research departments and their counterparts in
investment banking, big companies routinely assessed "research
support" as they shopped among investment banks for advice on
mergers and acquisitions or help in underwriting shares or debt.
Companies were known to exclude from lucrative assignments those
firms whose analysts were negative on their shares, steering
business instead to investment banks where the analyst recommended
the company's shares.
People close to
AT&T said yesterday that in January 2000, AT&T began a
six-week "beauty contest" in which the big Wall Street investment
banks competed for a leading role in its wireless stock offering.
As part of those presentations, investment banks routinely
highlighted positive recommendations on the potential client's
stock from their designated analyst. AT&T
Is Asked For Information On Dealings With Salomon The New York
Times August 24, 2002
Investment bankers employed analysts and
expected them to identify with the corporate mission and support it.
They paid analysts royally for their services. Their remuneration and
bonuses were linked to the contribution they made to the bankers
success in acquiring lucrative business from the companies on which
they reported. Citigroup's Grubman was paid US $20 million a
year.
Teams were set up. These included investment
bankers selling their services and analysts reporting on the
companies and their potential for success.
Mr. Spitzer
released hundreds of documents, many of them e-mail messages,
showing how closely Merrill's analysts and investment bankers
worked together to attract lucrative deals for the firm.
The e-mail
messages also showed analysts, including Henry Blodget, who
followed Internet stocks for Merrill, privately deriding companies
whose shares they were recommending to the public.
Wall St. Firms Said to
Break E-Mail Rule The New York Times May 7, 2002
Analysts whose glowing reports brought in the
business for the banks were promoted and marketed until they became
trusted household names. The industry honoured them with awards.
Investors followed their every word. Pressure was put on reluctant
analysts to get them to conform. Many of these companies praised by
the analysts were not viable and should never have been
traded.
"A great
number of these companies should never have been funded," said
Alexi Coscoros, a high-yield analyst at Bear, Stearns. "As long as
the market was prepared to buy them, Wall Street was quite happy
to bring these companies to market. But high-yield investors were
buying paper for companies that were not fully funded and that
carried much higher risk than anyone understood."
Wall Street, of
course, is not known for scaring off investors with too much talk
of risk.
--------------------------------
Finding Fame and Fortune
In 1994, Mr. Grubman, well on his way to becoming a star
analyst, left Paine Webber for Salomon Brothers. By the time the
firm was taken over by Smith Barney in 1998, Mr. Grubman had
toppled rivals and gained the top ranking in his industry on
the All-American Research Team, as listed by Institutional
Investor magazine.
Telecom's Pied Piper:
Whose Side Was He On? The New York Times November 18, 2001
They caught
analysts discussing the pressure they felt to overrate companies
that Merrill had landed or hoped to land as investment banking
clients.
That conflict
has been apparent to Wall Street insiders and some sophisticated
investors for many years. Most major brokerage firms -- including
Merrill, Morgan Stanley Dean Witter, Salomon Smith Barney and UBS
PaineWebber -- live under the same roof with investment
banks.
Investor Discontent
The New York Times April 12, 2002
Analysts who failed to promote and support
the company soon disappeared. Those who did were crowned with glory.
In this situation people who could compromise their principles and
could rationalise and justify this sort of behaviour succeeded and
became role models. Their flamboyant behaviour, conduct and
rationalisations created the myths around which corporate culture
coalesced.
And Mr.
Grubman, at the top of his game, was scoffing at anyone who
questioned the propriety of having an analyst, whose job is to
provide investors with objective investment advice, work closely
with the firm's investment bankers. "What used to be a conflict is
now a synergy," he told Business Week in May 2000. "Objective? The
other word for it is uninformed."
----------------------------
In the old days, on the morning call to brokers, listeners would
hang on the analyst's every utterance, according to several
witnesses. He would speak expansively about his favorite
companies, taking 20 minutes to get through all his
points.
Telecom's Pied Piper:
Whose Side Was He On? The New York Times November 18, 2001
Individual bankers or analysts working for a
financial services group typically secured the allegiance of one or
more of the companies and came to act as an adviser to managers, many
of whom were not market wise. The primary interest of the bankers was
in advising floats and other financial benefits for the financier.
The company's interests were secondary. The bankers carried little
risk. They advised on takeovers and mergers where they generated
large additional profits. There was a large spin off as the company,
the executives and their families put business their way in several
additional areas.
Mr. Grubman
and his firm fared much better. Acting not only as an analyst
recommending stocks to investors but also as an adviser to
telecommunications companies on strategy, Mr. Grubman helped his
firm win almost $1 billion in fees during the late 1990's. He
earned an average of $20 million annually in recent years.
But with his
dual roles he also came to personify the conflicts of interest at
brokerage firms that have done significant damage to investor
confidence in recent months.
Bullish Analyst Of Tech
Stocks Quits Salomon The New York Times August 16, 2002
Mergers and takeovers were made by trading
stock. The higher the company's share price the more easily it could
take over competitors. Analysts willing to artificially boost stock
value by issuing ongoing positive reports were a boon for the
company. These reports encouraged companies to accept the bankers
advice to mount takeovers.
to
contents
An
Example
GRETCHEN MORGENSON writing in The new York
Times uses the McLeodUSA story to illustrate what happened, and the
role of Grubman/Smith Barney in the DotCom crashes. There are many
reports in the papers describing other similar occurrences for
Grubman and others.
Days of
Telecom Mania
McLeodUSA's rise, and crashing fall, is typical of the stocks
Mr. Grubman favored. Based in Cedar Rapids, Iowa, McLeodUSA began
as a provider of local and long-distance telephone service to
small markets in the Upper Midwest.
Advised by
Salomon Smith Barney from the outset, McLeodUSA bought and resold
local service from regional Bells and long-distance service from
WorldCom. The company was run by Clark E. McLeod, who in the
1980's built a long-distance business called Teleconnect that he
later sold to MCI.
Salomon led the
offering that brought the company public on June 11, 1996, raising
$240 million. The firm made $10 million in fees on the deal, which
priced the stock at $20 a share, not adjusted for subsequent
splits. (Adjusting for splits, the deal came at $3.33 a
share.)
Five weeks
later, with the stock at $24.25, Mr. Grubman began covering McLeod
with a buy recommendation and a 12-month price target of $40.
"McLeod represents one of the truly great business models that
will be executed in the new era of telecom," Mr. Grubman wrote,
predicting that it would be "one of the best return vehicles in
what will be a high-return segment of the telecom
industry."
Almost
immediately, McLeod began buying other companies, like Telecom USA
Publishing, a phone book publisher, at $74 million, and, in 1997,
Consolidated Communications at $420 million. But McLeod also
needed hefty amounts of cash to build a network. Since November
1996, when the stock traded at $28, the company has gone to the
stock or debt markets eight times, raising $3.5 billion. Salomon
led all the offerings, pulling in almost $100 million in fees over
the period, according to Thomson Financial. It also collected
advisory fees for the acquisitions, normally about 1 percent of
each deal's price for transactions worth more than $1 billion. The
total is unclear, but Salomon pocketed $7 million for advice on
McLeod's acquisition, in January 2000, of Split rock Services, a
small telecom company in Texas.
------------------------
Salomon Smith Barney also generated fees in other ways from the
deals Mr. Grubman helped foster. Often, it executed stock trades
for the executives of the companies, for which it was paid
commissions. At McLeod, for example, Mary E. McLeod, the
chairman's wife, sold $50 million in stock through Salomon on Feb.
8, 2000.
--------------------------
In all, Salomon's earnings from McLeod over the years far outpaced
McLeod's profits. As the company's revenue rose to $1.4 billion in
2000 from $267 million in 1997, it lost almost $1 billion over
that period. So far this year, it has lost an additional $2.6
billion.
The losses,
however, did not keep McLeod's stock from soaring. Every few
months, Mr. Grubman would reiterate his enthusiasm for the
company, coming out with a higher price target or another reason
to own the stock. In January 1998, for example, just days after
the company raised $225 million in bonds for McLeod, he increased
his price target on the stock to $53 from $50.
By March 2000,
McLeod shares reached a split-adjusted peak of $34.83, up almost
tenfold from the initial offering price.
--------------------------------
It was not until August, with McLeod's stock at $2.44, down 93
percent from its 2000 peak, that Mr. Grubman allowed in a report
that the company "had some missteps in the last year and a half,
most notably the ill-advised acquisition of Splitrock." He made no
mention that Salomon Smith Barney had advised McLeod that the
acquisition was worth the $2.1 billion it paid. Nor did he
acknowledge that in both January and April 2000, he wrote reports
praising the Splitrock purchase as a "smart strategic merger" that
dramatically enhanced McLeod's "position on the national
stage."
McLeodUSA, to
the chagrin of its investors, no longer finds itself on the
national stage. Its stock sells for 73 cents a share, and its
market capitalization, $455 million, represents 13 percent of the
money it raised from investors. On Thursday, McLeod wrote off $2.9
billion, most of it related to the Splitrock acquisition.
Telecom's Pied Piper:
Whose Side Was He On? The New York Times November 18, 2001
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contents
Close
Relationships
Bankers employed analysts whose role it was
to report positively on a particular company or sector. The banker
and analyst worked closely together. They sometimes attended board
meetings to advise and plan. Larger companies even provided office
space with computer and other support. Each large company was a gold
mine for the financial group they supported. Some even paid analysts
for positive research reports. Analysts in turn directed hot share
options to company executives, a form of bribery. Some investment
banks paid others to research and report positively on companies they
were doing business with.
Mr. Grubman
had extraordinarily close ties to the companies he followed.
According to a document released by the House committee, he
attended 10 board meetings at several companies in the late
1990's, including WorldCom, McLeodUSA and
Broadwing.
Bullish Analyst Of Tech
Stocks Quits Salomon The New York Times August 16,
2002
Specifically,
the memo said, four of the investigations involve personal trading
in securities of companies covered by the analysts. Another
inquiry involves an analyst who received "undisclosed
compensation" from a company the analyst
covered.
S.E.C. Taking Closer Look
At Wall St. The New York Times June 1, 2002
At firm
after firm, according to prosecutors, analysts wittingly duped
investors to curry favor with corporate clients. Investment
houses received secret payments from companies they gave strong
recommendations to buy. And for top executives whose companies
were clients, stock underwriters offered special access to hot
initial public offerings.
WALL STREET SETTLEMENT:
THE OVERVIEW;10 WALL ST. FIRMS REACH SETTLEMENT IN ANALYST INQUIRY
The New York Times April 29, 2003
In a
newly disclosed tactic, Morgan Stanley and four other brokerage
firms paid rivals that agreed to publish positive reports on
companies whose shares Morgan and others issued to the public.
This practice made it appear that a throng of believers were
recommending these companies' shares.
From 1999
through 2001, for example, Morgan Stanley paid about $2.7 million
to approximately 25 other investment banks for these so-called
research guarantees, regulators said. Nevertheless, the firm
boasted in its annual report to shareholders that it had come
through investigations of analyst conflicts of interest with its
"reputation for integrity" maintained.
In Wall Street Hierarchy,
Short Shrift To Little Guy The New York Times April 29, 2003
These practices did not commence with the
Dotcom companies, but this was when they were exposed. Smith Barney's
banker Benjamin Lorello did US $8 billion of health care corporate
business with HealthSouth between 1986 and 1999. Most of the health
care companies he floated for them subsequently fell in a heap, but
neither Lorello nor his close associates in HealthSouth suffered
large losses.
to
contents
The
Result
The consequence of all this was that the
glowing reports beating up the prospects for the Dotcom companies had
no relationship to their actual prospects. Analysts were put under
considerable pressure to generate favourable reports. Personal emails
secured by investigators described the analysts discomfort with this
and the adverse opinions they actually held of the companies.
Analysts expressed very different opinions in private correspondence
to the positive reports they gave the public. The investigations
started with Merrill Lynch and its analyst Mr Blodget, then moved on
to Citigroup and others.
The basis
for a case against Mr. Blodget emerged last April when Eliot
Spitzer, the New York attorney general, released Merrill Lynch
e-mail messages in which Mr. Blodget and his colleagues ridiculed
companies that they were recommending to the firm's clients. The
messages also showed how influential investment bankers were in
securing positive research reports for companies that were either
clients of the firm or potential customers.
For example, in
one e-mail message Mr. Blodget referred to InfoSpace, an Internet
company that he favored publicly, as "a piece of junk." And in a
1999 memo entitled Managing the Banking Calendar for Internet
Research, Mr. Blodget spelled out his schedule for the coming week
as 85 percent banking, 15 percent research. "Every day I get a
call or two from bankers I don't yet know with interesting
opportunities," he wrote.
Wall Street Star May Face Suit By Regulators The New York
Times January 4, 2003
Corporate survival depended on share market
support and this would vanish if profits started to fall and the
support of analysts was lost. To retain status and credibility
companies had to meet analysts' unrealistic projections. In
desperation a number of the biggest, including WorldCom resorted to
accounting fraud.
"The
imperative of meeting analysts' quarterly projections has trumped
the interests of shareholders and, indeed, threatened the
long-term prospects of the companies themselves," said John J.
LaFalce of New York, the committee's highest-ranking Democrat.
CORPORATE CONDUCT: THE
HEARINGS; 2 Former WorldCom Executives Refuse to Testify to
Congress The New York Times July 9, 2002
Each glowing report resulted in share prices
rising further with more investors rushing to buy shares, more
glowing reports, more floats and so on. The analysts were repeatedly
proven right by their self fulfilling prophesies. To survive in this
competitive environment companies took over competitors. They used
their share prices to do this. They would consequently go to almost
any lengths to keep their share price up. If they fell the value of
the company fell and it became a takeover target.
Mr. Ebbers,
who would not sell his WorldCom stock but who borrowed
aggressively from the company against his holdings, apparently did
not like to see his employees selling their shares.
"Bernie got a
report daily of who was exercising options and selling shares,"
Mr. Spartis said. "It was called 'Bernie's List,' and it was made
up of people that were blocked from doing transactions and had to
get Bernie's approval if they wanted to do anything. If you were
at headquarters and you were below top-tier management and you
sold shares, you would get a call from Bernie."
Mr. Spartis
suggested that Mr. Ebbers might have tried to prevent insiders
from selling WorldCom stock to keep the share price high. Without
a high-priced stock, Mr. Ebbers would have no currency to make
WorldCom's acquisitions, and without the deals, revenue growth
would fall short of expectations. (Philip L. Spartis is a
manager fired by Smith Barney) I.P.O.
Plums For Titans Of Telecom The New York Times August 4, 2002
Ultimately reality had to intrude and the
bubble burst. The financiers who carried little risk walked away with
the money and the trusting investors carried the losses.
As Nasdaq
stocks soared into the stratosphere during the late 1990s, Wall
Street analysts invented ever more fanciful ways of valuing these
companies and justifying one-year target prices that were 50 per
cent or 100 per cent higher than those they had already
reached. Lawsuits to
swamp top analysts: Investors hold pundits accountable for
billion-dollar losses Edmonton Journal (Alberta) March 10,
2001
A year ago,
analysts believed that (shares of) just 206 US companies -
or 0.8% of all those rated - should be sold, according to research
by Thomson Financial-First Call.
---------------------------
In 1992, says Baker, the buy-sell split was about 50:50.
-------------------------
"The writing is so coded that only sophisticated investors
understand that you would have to be an idiot to own the stock,"
said Baker (Congressman) this week. "Mom and Pop investors
are not getting the same treatment."
---------------------------
Research by Jay Ritter, Cordell professor of finance at the
University of Florida, found that the average first day increase
of American IPOs during the last two years of the millennium was
65%. This compares with 6% during the whole of the 1980s.
The great Mom and Pop
rip-off: Wall Street is entering a firestorm of litigation as
investors round on the analysts who sold them the dot.com boom
The Guardian (London) June 1, 2001
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Categorising
the frauds
The frauds which resulted were interlinked
but they can be categorised for descriptive purposes.
- The deception of the public by analysts
and bankers described above. This lay at the heart of the market
bubble.
- The bribes and kickback arrangements with
corporate executives known as "spinning" to secure their loyalty
and support
- The exploitation of employees when
advising and trading their options
- The fraud perpetrated by the corporations
when they were unable to meet the inflated expectation of the
marketplace on whose support they depended
- The complicity of the giant accounting
and auditing firms in the accounting fraud used by large
corporations to maintain their market support as they
crumbled
- The complicity of the large banks in the
accounting frauds which helped sustain the credibility and market
support for the companies they worked with.
These related frauds are dealt with over a
number of web pages emphasising the important part, which the bankers
and the accountants played in each of them.
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Who paid
the price and how
much?
The investing
public
The bubble burst in 2000 and over the next 2
years the market in technology and DotCom shares disintegrated. In
the process the public, whose money was being used, whose interests
the financial institutions were committed to serve, and who should
have benefited from the financial proceeds of the technological
advances were systematically deceived and ripped off. Dreams were
shattered and many were bankrupted. The fraud is estimated to have
cost investors trillions of dollars.
But
together, along with other recent telecom failures and those still
likely to occur, they represent one of the most spectacular
investment debacles ever. Bigger than the South Sea bubble. Bigger
than tulipmania. Bigger than the dot-bomb. The flameout of the
telecommunications sector, when it is over, will wind up costing
investors hundreds of billions of dollars.
---------------------
It is impossible to tell how many investors profited from Mr.
Grubman's advice on the way up. But those who stuck with him until
the end, heeding his advice and holding on to the stocks, have
fared dismally. In one telecom arena that Mr. Grubman dominated,
among the so-called competitive local exchange carriers, some $140
billion in stock market value has vanished -- 95 percent of the
cash raised.
--------------------------
The money raised for telecom companies through the sale of debt --
notes, bonds and convertible issues -- was even larger, with
bigger losses. From 1997 to 2000, according to Lehman Brothers,
telecom companies borrowed close to a half-trillion dollars. This
year alone, telecom companies that issued high-yield debt have
defaulted on $21.4 billion of it, according to Bear, Stearns &
Company. That amount accounts for 56 percent of all defaults,
across all industries, in 2001. More defaults in the industry are
expected. Telecom's Pied
Piper: Whose Side Was He On? The New York Times November 18,
2001
An estimated
$2 trillion has been lost by investors and lenders who put money
into the telecommunications industry. Of the 25 largest bankruptcy
filings in the United States, 10 have been made by
telecommunications companies. Mr. Grubman recommended the stocks
of all of them.
Bullish Analyst Of Tech
Stocks Quits Salomon The New York Times August 16, 2002
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System
failure
The response of the community as expressed by
those who have lost their life's savings is understandable, but it is
simplistic to look at this as simply due to greedy analyst criminals
who should be punished. It represents a massive system failure at the
heart of our capitalist society. It is a problem that has been
growing and continues to grow as those in positions of power, but
particularly politicians look the other way. It is not the first time
it has happened nor the first time that authorities have responded
inappropriately.
A deluge of
lawsuits is about to hit some of Wall Street's top
analysts.
Irate investors
are blaming pundits' bullish reports on companies for helping to
create a stock-market bubble and losing them billions of dollars
when the market crashed last year.
A $10-million US
lawsuit filed last week by a New York doctor against Henry
Blodget, Merrill Lynch's top Internet analyst, says stock analysts
engage in "systematic fraud ... on an industry-wide
basis."
Jacob Zamansky,
the doctor's attorney, says Blodget recommended investors buy
stock in companies without revealing that Merrill Lynch was
earning money as a financial adviser to these companies or to
companies that they were about to
acquire.
Lawsuits to swamp top
analysts: Investors hold pundits accountable for billion-dollar
losses Edmonton Journal (Alberta) March 10, 2001
Ms. Howell
(an investor who lost everything) said yesterday. "All
parties who were involved in this institutional breach of ethics
should be held accountable and should be banned from Wall Street
for life. Mr. Grubman's supervisor, the brokers who led the retail
clients to slaughter, all of them should be held accountable."
The Final Frontier for
Wayward Wall Street? The New York Times December 21, 2002
The response of regulators and the market to
the analyst and spinning scandals is reviewed on a separate
page.
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Global
considerations
Infectivity
Successful business practices are seldom
localised. They are snapped up by other companies. They are soon
internationalised as others buy US expertise and appoint successful
US managers to international operations.
This is well illustrated
by what happened when Tenet
Healthcare (then called
National Medical Enterprises - NME) entered
Australia in December
1991 buying the struggling Markalinga. Markalinga (soon renamed
Australian Medical Enterprises - AME) contracted the services of
an NME executive to turn around the almost bankrupt company and
paid $1 million a year for NME "expertise".
When Justice Yeldham crafted
licence conditions to protect Australia from NME's disturbing
business practices he carefully excluded this executive from his
conditions and did not mention the expertise which was being
purchased. This continued without restraint.
NME's Australian company
immediately secured large loans from Australian banks to fund
expansion. The banks made these loans conditional on the
continuation of the agreement for this expertise and the
employment of this administrator.
This business expertise which
Australia was so intent on importing was throughout this period
making headlines because it had resulted in the misuse of citizens
and a massive fraud. All the parties were well aware of this. The
first US $200 million (of a total of about $1 billion) fraud
settlement had already been made
This executive is currently a
senior administrator in the Californian region where Tenet
hospitals have been accused of carrying out unnecessary
high risk surgery to
increase profits.
Successful bankers and analysts were poached
by others. The profitable banker Benjamin Lorello was
poached
by USB Warburg. Goldman Sachs made an
attempt to entice Grubman but Smityh Barney offered enough to keep
him. The number of Smith Barney bankers mentioned in articles who
have moved to other companies reflects this spread of
"expertise".
"Goldman
Sachs made a grab for Grubman," Mr. Baker said in his statement.
"While Grubman's conflicts of interest are the thing that led to
his downfall at Salomon Smith Barney, they were the very same
characteristics that made him hot property for Goldman in 1998.
Jack Grubman was the poster child of analyst conflicts, and yet
Goldman pulled out all the stops to put him on the payroll."
Goldman Wooed A Star
Analyst, DocumentsShow The New York Times October 12, 2002
They were
the guys behind the curtain while Mr. Grubman was taking his bows.
- - - - - - These bankers include Tony Whittemore and David Diwik,
who left Salomon for Deutsche Bank in November 2000, and Tom Jones
and Christopher Lawrence, former Salomon bankers now at Credit
Suisse First Boston. Others still at Salomon are John Otto, Steve
Winningham, Eduardo Mestre and Thomas King. Mr. Mestre, Mr. King
and Mr. Whittemore were among those cementing the WorldCom
relationship at the bank. A
Star Analyst Exits Loudly. Others Hide Backstage. The New York
Times August 18, 2002
Not unexpectedly similar practices are
identified in Europe and in the absence of a careful investigation we
should assume that they are also common in countries like
Australia.
Morgan
Stanley was slapped, in France, with a $38 million fine this week
for publishing controversial research against the luxury goods
maker LVMH
-------------------------------
But what you are seeing happen right now is in Europe, a little
bit of a backlash against the analyst that we saw the last couple
years here.
Europe didn`t go
through the -- even though it was a global settlement -- it was a
global settlement with mostly with U.S. investment banks -- a lot
of change hasn`t happened in research in Europe. So what people
are trying to do is fight back.
--------------------------------
I doubt they will have a big research settlement, as you saw in
the U.S., but there are some people saying that at some point
there are going to have to be changes made to the way research is
published and done in Europe.
Citigroup Under Fire In
France for Research Against LVMH, Interview CNNfn: Money &
Markets January 13, 2004
THE spat
between French companies and analysts who publish research on them
grew yesterday as Sodexho Alliance, the Paris-listed catering
company, accused Citigroup, the US financial services giant, of
issuing misleading research.
-------------------------------
Sodexho's decision comes in a week in which a Paris court told
Morgan Stanley, the US investment bank, to pay Euro 30 million
(Pounds 21 million) to LVMH for issuing biased
research.
Sodexho accuses Citigroup
analysts The Times January 14, 2004
A closely related Wall Street scandal, that
of share spinning illustrates the tendency of dysfunctional practices
to go global. The issue was picked up in London.
The
Financial Services Authority has launched an investigation into
whether City investment banks have been handing out shares in
"hot" flotations to favoured clients.
The informal
investigation into the preferential allocation of hot IPO shares
comes just weeks after the regulator said it did not believe such
practices had taken place in the UK.
US regulators
have been probing "spinning" for several months, amid concerns
that it was rampant during the internet bubble.
-----------------------------
The FSA's investigation is likely to focus on the frenetic
activity in the IPO markets driven by the technology and telecoms
boom of the late 1990s. FSA
launches probe into share 'spinning' CITY BANKS TO BE ASKED ABOUT
PREFERENTIAL IPO ALLOCATIONS Financial Times (London,England)
October 24, 2002
Structured finance packages, used to assist
in fraudulent accounting for Enron have been traded across the world
and seem to be at the heart of the Italian
Parmalat fraud where Citigroup has
been accused and is under investigation.
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Wall Street
Omnipotence
Senior US executives are in charge of
international operations. They use their expertise and introduce
practices, which have been successful for them in the USA.
Regulators criticised for their failure to
prosecute individuals in the settlement responded by indicating their
intention to now go after individuals. Citigroup fired many analysts
and bankers. It can be debated as to whether this was a genuine
attempt to clean up, or intended to show that the company had already
acted when individuals were later prosecuted. Perhaps it was simply
the under the table part of the deal with regulators - what Sandy
Weill promised he would do if they exonerated him and would allow
Citigroup to put the fraud behind them.
The point here is that those fired included
staff in "global" departments. They also set up the sections doing
the "spinning", one of the frauds exposed in the DotCom bust. They
knew what was being done and how profitable it was. They were likely
to pressure international operations for the same performance.
Affinity Health in Australia is likely to be
pressured by Salomon Smith Barney and CVC Asia Pacific for the same
performance generated by Tenet or Comumbia/HCA in the USA using
unsavoury practices.
Two of
Citigroup's most senior investment bankers, Robert K. DiFazio and
Arthur D. Hyde III, have been removed from their positions, the
company said yesterday
---------------------
Mr. DiFazio and Mr. Hyde were co-heads of the company's global
equities division, which encompasses its trading, underwriting and
equity allocation businesses. Both bankers were also members of
the firm's management committee.
---------------------------
The equities division of the bank has been a weak financial
performer and an area of interest for regulators.
---------------------------
While the letter offers no evidence that Mr. Hyde was directly
involved in spinning, it does show that he had a hand in setting
up the unit that would go on to funnel hot public offerings to
favored clients of the firm. Citigroup
Ousts 2 Top Investment Bankers The New York Times May 9, 2003,
Friday
As global heads of the equity division these
individuals would likely have had responsibility for relationships
with CVC Capital Partners, and control of CVC Asia Pacific. This
raises the question as to what part "spinning" and overblown analysts
reports might have played in the successful floats carried out by
these companies in Europe and Asia including Australia. Did they set
up similar profitable practices there? It would be logical for them
to do so.
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International
Blindness
Part of the head in the sand attitude has
been a failure of other countries, including Australia to respond to
what happened in the USA by mounting its own investigations of these
companies' international divisions. No attempt has been made to
restructure our systems so that profit pressures are reduced and
social responsibility is internalised.
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The Role of the
Companies
Citigroup
MEASURED by
its stock market action alone, 2001 was clearly a disappointment.
But judge the year instead by the audacity of its corporate
schemers, Washington scalawags and Wall Street rogues, and 2001
becomes tough to top. A
Roster Of Awards Better Off Unawarded The New York Times
December 30, 2001
The
settlement is the second instance in less than a decade that Wall
Street firms have agreed to pay about $1 billion to settle
regulatory charges of anti-investor practices. In 1997, about 30
brokerage firms and Nasdaq agreed to pay about $1 billion to
settle an investor lawsuit that they had colluded to keep costs
unnaturally high in the trading of Nasdaq
stocks.
WALL STREET FIRMS ARE
READY TO PAY $1 BILLION IN FINES The New York Times December
20, 2002
Citigroup,
the world's largest financial services company, agreed to pay
$400 million as its part of the $1.4 billion accord to
settle claims Wall Street research was compromised by the effort
to win banking business. The firms also agreed to change the way
they supervise and compensate analysts.
The penalty paid
by Citigroup was the largest among the 10 banks settling
conflict-of-interest claims. Authorities also imposed the stiffest
restrictions on the company
-----------------------------
"Because of Salomon Smith Barney's and Citigroup's record of
violations, those companies face additional requirements that go
well beyond the global settlement," said New York State Attorney
General Eliot Spitzer. "These provisions are necessary and
appropriate." Citigroup
CEO Barred From Talking To Bloomberg News May 5, 2003
World number
one Citigroup's brokerage arm, Salomon Smith Barney, took the
heaviest blow with a record fine - - -
'Biased'
Wall St firms fined $2.26bn Australian Financial Review April
29, 2003
What happened occurred across the entire
financial services sector and all of the largest groups were
involved. Citigroup is the largest and most successful of the
financial services companies. Its success reflects its core
involvement in these activities. Had it not been involved it would
not have enjoyed this success.
Its practice of allocating bankers and
supporting analysts to each large company goes back at least
into the
1980's, as is revealed in the
HealthSouth scandal. It payed more than twice as much as any of the
other corporate fraudsters in the US $1.4 settlement
In addressing each of these frauds I will use
Citigroup and particularly Smith Barney as the main example. It is
here that the primary problem arises. It is Smith Barney which holds
Citigroup's health care expertise and works with health care
corporations. It is the similarities between what Smith Barney did
and what the health care corporations many of which it probably
advised did that is of immediate interest on this web
site.
Wall
Street's role as enabler in the telecom binge, and Salomon Smith
Barney's part in particular, is undeniable. Since 1997, the firm
has collected $809 million underwriting telecom stocks and bonds
and $178 million providing merger advice, according to Thomson
Financial -- 43 percent more than the fees made by Merrill Lynch,
its closest rival in the sector. Telecom's
Pied Piper: Whose Side Was He On? The New York Times November
18, 2001
Citigroup's participated actively in the
deception of the public by analysts from Smith Barney, in the
indirect bribes (called spinning) given to corporate executives by
Smith Barney and in abetting and aiding fraud by the companies which
did business with Citigroup.
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The
Witches Brew
This was an evil witches brew but in one
sense Citigroup, Sandy Weill, Jack Grubman, the chief executives of
the technology companies and all the other participants were simply
the ingredients that boiled and bubbled then congealed in a foul
mess. This section examines some of the ingredients in the
brew.
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The
analysts
Each of the large financial groups found
pliant analysts and promoted their credibility, giving them power and
influence. They were richly rewarded. Their income was tied to the
business which their reports brought in.
Meeker,
dubbed Queen of the Internet by Barron's, the financial magazine,
has also been accused of making her stock recommendations to help
her firm win business. She even played a role in persuading Time
Warner to merge with America Online and has been the "rah-rah
girl" for a long list of flotations by Morgan Stanley.
Like Blodget,
Meeker has never put a sell rating on any company. At the end of
last year she rated all 11 net stocks that she follows
"outperform," even though they had fallen an average 83 per
cent.
-------------------------
Blodget and Meeker received salaries of $15 million a year for
their work. Grubman got $20 million.
Lawsuits to swamp top
analysts: Investors hold pundits accountable for billion-dollar
losses Edmonton Journal (Alberta) March 10, 2001
When the analysts conduct was exposed they
were at first supported by their companies but when this became
impossible they were fired. Grateful financiers kept them on side
with large termination bonuses and sometimes other arrangements. They
would not want them speaking out in court.
Individuals like Henry Blodget (Merril
Lynch), Mary Meeker of Morgan Stanley, Frank Quattrone (Credit Suisse
First Boston), and Ron Barone (UBS Warburg) became household names
and investors hung on their words and followed their advice. Gretchen
Morgenson the reporter who covered the scandal and wrote many of the
articles in the New York Times gave the award winning analysts a new
set of awards - her own. Ron Barone who kept positive reports on
Enron almost to the bitter end got "THE OFTEN WRONG BUT NEVER IN
DOUBT AWARD". Blodget got "THE IT WAS FUN WHILE IT LASTED AWARD".
Grubman, the name linked forever to the DotCom bubble got an award
for the praise he heaped on companies on the verge of
bankruptcy
THE BALANCE
SHEET DOES MATTER AWARD -- To Jack Grubman, the telecommunications
analyst at Salomon Smith Barney who has lost investors so much
money that he could give new meaning to the term "Neutron
Jack." A Roster Of Awards
Better Off Unawarded The New York Times December 30, 2001
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Citigroup's
Jack Grubman
The most famous and later infamous of the
analysts was Jack B. Grubman, the technology analyst Smith Barney
acquired when it acquired Salomon Brothers. Almost single handedly he
started and maintained the technology boom. He continued to put out
positive reports advising the market to buy shares in Worldcom and
related companies, long after others advised caution, and until they
collapsed. He strongly denied allegations challenging his
integrity.
He more than anyone represents the blurring
of roles - a situations in which analysts became salesmen. Because of
their influence analysts outsold the investment bankers whose task it
was to sell the bank's services.
There is little sympathy for Grubman whose
fine of $15 million leaves him free to enjoy the fruits of what he
has saved from his US $20 million a year salary. He has become the
focus of investigations by multiple regulatory bodies and
congressional committees. He is being sued by large numbers of
investors and even by past Citigroup' brokers who blame his reports
for the incorrect advice they gave their clients.
The
telecommunications mess stands out for another reason: One man is
at its center -- Jack Benjamin Grubman.
No single person
can be responsible for the entire debacle, of course, and
investors must take responsibility for some of their losses. But
as resident guru on telecommunications at Salomon Smith Barney and
one of Wall Street's highest-paid analysts, Mr. Grubman, 48, was
surely the sector's pied piper. During the height of the mania, in
1999 and 2000, he had buy recommendations on 30 companies,
considerably more than most analysts. Mr. Grubman lured more
investors into securities of nascent and risky telecom companies
than perhaps any other individual.
---------------------------------
As the number of telecom deals ballooned, and as Mr. Grubman's
picks ascended, his hegemony in the industry and the firm took
hold. That attracted still more business from executives who knew
both how positive he was on the sector and how powerful his buy
recommendations could be. - - - - - - - Companies deluged Salomon
Smith Barney for their capital needs, and Mr. Grubman churned out
glowing research reports, annually collecting a
multimillion-dollar pay package.
---------------------------
Many companies he favored are defunct or are trading for pennies a
share or have been delisted from the Nasdaq market.
------------------------
But Mr. Grubman's reports show a particular disregard for the
dangers of heavy debt piled on unproven companies.
--------------------------
Mr. Grubman often issued optimistic reports and buy ratings as his
firm was handling a purchase, stock offering or bond issue for the
company. Telecom's Pied
Piper: Whose Side Was He On? The New York Times November 18,
2001
It is a
violation of N.A.S.D. rules for an analyst to maintain a rating or
price target on a company's shares that is not based on sound
reasoning or that overlooks evidence that could disprove the
analyst's argument. Sanctions in such cases can include fines,
suspension and expulsion from the
industry.
Two Inquiries Are
Reported On Stock Picks Of Analyst The New York Times July 23,
2002
Critics of
Jack Grubman's last deal, his $32 million severance package, are
missing the big picture. - - - - - But look at it this way: While
investors lost $2 trillion in the implosion of the sector, his
employer, Citigroup, made $1 billion in fees from the feverish
dealmaking he helped arrange.
------------------------
Mr. Grubman's seal of approval was nearly all upstart telecom
companies needed to access billions from Salomon-orchestrated bond
offerings and initial public
offerings.
Jack Grubman's Last
Deal The New York Times August 17, 2002
With
regulators and politicians looking for culprits to blame for the
debacle in the US financial markets, Mr Grubman has himself become
a prime target, to many, a symbol of what was wrong about the way
Wall Street worked during the boom years.
------------------------
Salomon will meet his legal bills - no small matter, given the
blizzard of arbitration claims he faces from investors.
-----------------------
To critics, he embodied the untenable conflicts of interest that
characterised the boom years. He tried to bridge the traditional
gulf between investment banking and equity analysis - between
being a confidential adviser to corporate chieftains and an
independent commentator on their
companies.
Wall Street's faithful
bull: MAN IN THE NEWS JACK GRUBMAN Financial Times
(London,England) August 17, 2002
Citigroup are standing by their man and
assuming all his expenses. They must if they want him to carry the
can and not dob them in. They have given him an office and a salary
so that he can assist them in defending law suits. He said too much
on one occasion and they do not want a repeat.
In a
response to that lawsuit, which involved his reports on Winstar
Communications, a defunct telecommunications concern, Mr.
Grubman's lawyer pointed to an e-mail message that the analyst had
written, which said that because of pressure from Salomon bankers,
he kept a buy rating on Winstar even as the company
floundered.
Citigroup Hurt By Worries
That Inquiry Could Widen The New York Times October 24, 2002
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Corporate Culture :
Grubman as a product
In a sense though Grubman and the other
richly rewarded analysts are victims too, victims of the
circumstances in which they found themselves - the context
of their lives. It was because the
system favoured and supported the sorts of people they were that they
became so powerful and influential.
His
superiors well knew, and applauded, the game he played. Mr.
Grubman has not been charged with any criminal behavior, but
Congress, the National Association of Securities Dealers and Eliot
Spitzer, New York State's attorney general, are all looking into
Salomon practices, - - - - - - - The Securities and Exchange
Commission and federal prosecutors have opened their own
inquiries, and investors who snatched up WorldCom bonds have filed
civil suits against Citigroup. Jack
Grubman's Last Deal The New York Times August 17, 2002
In a more sensible and civilised society
people with these characteristics would be kept in mundane positions
where they could be safely supervised and constrained. One can
imagine them sweeping the streets under the watchful eye of patroling
police.
These people would never have attained the
positions they did had the rogue culture within the financial banks
not created the situations that gave them opportunities and actively
connived in supporting their practices. In a sense analysts simply
became the scapegoats. It was the market system that created the
conditions favourable for the development of the culture, and which
supported it and allowed it to flourish. Small voices of dissent as
always went unheard.
But Mr.
Grubman was by no means alone in pumping up the telecom bubble. He
had much help from his colleagues in Salomon's investment banking
group.
So far, these
people have escaped much attention. Some have departed Salomon for
other firms, but all made enormous money helping to finance the
sector, perhaps even bigger money than Mr. Grubman
pocketed.
They were the
guys behind the curtain while Mr. Grubman was taking his bows. But
they are every bit as culpable as Mr. Grubman for the $2 trillion
in losses that investors and lenders have incurred in the telecom
sector in recent years. They were the ones who advised telecom
companies to load up on debt, creating a capital structure for
many of them that was bound to fail.
A Star Analyst Exits
Loudly. Others Hide Backstage. The New York Times August 18,
2002
But
securities regulators also found that all the firms failed to
supervise adequately the research analysts and investment banking
professionals they employed. They failed, therefore, to protect
clients who were basing investment decisions on research that had
been written to attract or maintain investment banking
clients.
While the
symbiotic relationship between Wall Street research analysts and
investment bankers harmed investors, it was beneficial to the
firms.
-----------------------
Some of the most entertaining reading in the masses of evidence
that regulators have made public for use by aggrieved investors in
their own lawsuits is the commentary by Salomon Smith Barney
brokers about Jack B. Grubman's performance as the firm's top
telecommunications analyst.
As far back as
2000, brokers were expressing outrage and betrayal over Mr.
Grubman's woeful stock picking, which many noted was related to
his dual roles as investment banker and analyst. Yet even as the
brokers howled about Mr. Grubman's tendency to keep recommending
stocks as they collapsed in price, the analyst retained his job at
Salomon until last August.
----------------------------
Many said the analyst should be fired, while another broker said,
"If Jack Grubman is a top 'research analyst' then I have a bridge
to sell."
Another
remarked: "Boo Hiss. Banking showed its ugly head."
---------------------------
"Grubman has zero credibility with me or my clients. He is
collecting from two masters" at financial consultant expense. - -
- The spin-masters will say that everyone else does it. Is there
an honest person left?" In
Wall Street Hierarchy, Short Shrift To Little Guy The New York
Times April 29, 2003
Securities
regulators have told the former head of research at Citigroup
Inc.'s securities unit that they expect to charge him with civil
rule violations. (Not Grubman)
-----------------------------
- - - - they are ready to charge him with violating NASD rules on
misleading advertising, failure to supervise and fair dealing with
customers.
Ex-Citigroup Head May
Face Charges Reuters http://www.yourlawyer.com July 9, 2003
When a firm pays another firm large sums for
favourable reports that payment is ratified up through all levels of
the system and by the accounts departments. It is not something the
analysts do alone.
If an
analyst signed a research report supporting a stock while
privately admitting to doubts, "the only appropriate reaction is
outrage," Donaldson (Chairman of the US Securities and Exchange
Commission) said.
"When a firm
publishes favourable research about a company without revealing to
its customers that that research - far from being independent -
was essentially bought and paid for by the issuer, we had no
choice but to conclude that the research system was broken."
'Biased' Wall St firms
fined $2.26bn Australian Financial Review April 29, 2003
The AT&T case exposed the close links
between Grubman and Sandy Weill Citigroup's chairman. I will explore
the AT&T case in greater detail when I look at the
sort
of people Grubman and Weill were. It
tells us about them.
But by
issuing the subpoena to AT&T, Mr. Spitzer may also be trying
to determine whether the relationship between Sanford I. Weill,
chairman of Citigroup, and C. Michael Armstrong, AT&T's chief
executive, played a role in Mr. Grubman's 1999 change of heart on
AT&T shares. AT&T
Is Asked For
Information On Dealings With Salomon The New York Times August
24, 2002
Bill
Fleckenstein, president of Fleckenstein Capital in Seattle, said
the incident (AT&T) showed "that it wasn't just the
analysts and the corporate finance guys on Wall Street who would
do whatever it took to make a buck. The C.E.O.'s did, too." But
this was standard practice on Wall Street in the 90's, he noted.
"The only reason we get to know about this is there was a paper
trail," he said. And a doozy of a trail at
that.
Does the Rot on Wall
Street Reach Right to the Top? The New York Times November 17,
2002
While Mr.
Weill has publicly acknowledged asking Mr. Grubman to take a fresh
look at AT&T, documents released yesterday show that their
discussions were intricate and numerous and dated as far back as
the fall of 1998.
---------------------------------
Citigroup lawyers contend that Mr. Weill thought all along that
Mr. Grubman was simply doing his job, as an objective and
well-regarded industry analyst, in reassessing AT&T's
performance and that he did not allow Citigroup's relationship
with the company to influence his thinking.
-------------------------
But Mr. Grubman was not paid $48 million over three years in the
1990's to provide investment advice to individual
investors.
Instead, it was
his ability to corral the banking business of a new wave of
telecommunications companies ÷ many of which were competitors
of AT&T, like WorldCom ÷ by publishing positive research
on them that made him a meal ticket for Mr. Weill.
Citigroup's Chairman
Is Barred From Direct Talks With Analysts The New York Times
April 29, 2003
Behind the market system were distorted
patterns of belief that had escaped the common sense critical
scrutiny of a functioning community. The fault lies with the stock
market and its chairman Richard A. Grasso, with the politicians, and
so ultimately with the community which allowed the ascendancy of a
distorted doctrine about markets which corrupted its
values.
The
fluid nature of the Grubman-Weill relationship underscores as well
the regulatory pitfalls that arise when financial conglomerates
the size of Citigroup try to please such diverse constituencies as
retail investors and investment banking clients, all with their
conflicting interests.
Citigroup's Chairman Is Barred From Direct Talks With Analysts
The New York Times April 29, 2003
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