- The Washington Times - Friday, August 23, 2002

Over the past two-and-a-half years, investors in telecom companies have lost $2 trillion, while the industry has shed 500,000 jobs. More than any other investment bank, Citigroup's Salomon Smith Barney was responsible for underwriting the emergence of so many of the once-highflying, now-bankrupt telecoms. Now, amid the financial devastation epitomized by the telecom carcasses littering the information superhighway, Salomon continues to spend the monetary fruits of its widely cursed efforts like a drunken sailor. How else to explain the $32 million platinum parachute that Citigroup sanctioned as a departing windfall for Jack Grubman? It was Mr. Grubman, after all, who was Salomon's "Pied Piper of Telecom." As Wall Street's most powerful and most conflicted stock analyst, he piped the music as one telecom basket case after another headed over the cliff.

Many in Congress are demanding that corporate executives forfeit the millions of dollars from stock sales they pocketed shortly before their enterprises imploded. Today, the deadline for Citigroup to comply with a subpoena Congress issued relating to Mr. Grubman's questionable distribution of hot initial public offering (IPO) shares, might be the time to ask Citigroup what Mr. Grubman had done to earn such an outrageous payoff. After all, more than any other analyst, Mr. Grubman failed miserably to comprehend the telecom industry's financial destruction, which was occurring literally under his nose.

To review one of numerous now-bankrupt examples which include Global Crossing, McLeodUSA, Enron-related Rhythms NetConnections, Winstar Communications, XO Communications, etc. consider Mr. Grubman's role in WorldCom, which became the nation's largest bankrupt enterprise in July.

In June, WorldCom acknowledged that it had massively overstated its profits in 2000 and the first quarter of 2001 by improperly classifying nearly $4 billion in routine expenses as capital investments. In May 2001, Citigroup managed a WorldCom bond offering of nearly $12 billion, arguably failing to exercise the due diligence that underwriters are expected to conduct. Mr. Grubman's loudly trumpeted rapturous infatuation with WorldCom greased the skids for the bond deal.

Then, throughout the balance of 2001 and well into 2002, as credit-rating agencies repeatedly downgraded WorldCom, Mr. Grubman continued to recommend the firm as a "strong buy," even as its stock shed 90 percent of its value and plunged to $4 a share. In a blatant conflict of interest, moreover, he furtively attended several WorldCom board meetings and provided strategic advice to WorldCom executives, while portraying himself to investors as an independent analyst working on their behalf.

Today, Citigroup is expected to comply with a subpoena issued Aug. 13 by the House Financial Services Committee. Earlier, Citigroup failed to provide documents the committee requested following Mr. Grubman's disingenuous testimony in early July. Asked if Salomon had improperly allocated blocks of extremely profitable IPO shares to WorldCom executives, Mr. Grubman cagily replied, "I don't recall. I'm not saying 'no.' I'm not saying 'yes.' "

Former Salomon employees have charged that the investment bank routinely allocated substantial IPO blocks to the executives of companies that generated huge underwriting fees for Salomon. (Since 1997, according to Thomson Financial, telecom firms have paid Salomon more than $800 million in underwriting fees for debt and equity offerings and nearly $200 million for merger advice, a combined total that exceeds the next highest Wall Street firm's payments from telecoms by more than 40 percent.) Meanwhile, the Wall Street Journal recently reported that the National Association of Securities Dealers (NASD) has obtained evidence confirming that Salomon lavished "free money" on several corporate executives by directing hot IPO shares into their personal brokerage accounts.

In a separate investigation of Mr. Grubman, the NASD has made a preliminary finding that the stock analyst violated security regulations relating to his overly exuberant assessments of now-bankrupt Winstar. Meanwhile, the New York state attorney general has been investigating Mr. Grubman for months for his role in attracting billions of dollars of investment in now-bankrupt firms. He is also under investigation by the U.S. attorney for the Southern District of New York.

In what appears to be a fair assessment of Mr. Grubman's role in the telecom debacle, House Financial Services Committee Chairman Michael Oxley has observed, "In his pursuit of riches, he has failed in his fiduciary obligations and has deceived investors for too long." Given the overwhelming evidence of Mr. Grubman's failure to perform his job which, as a stock analyst, was to provide investors with sound advice perhaps Mr. Oxley ought to ask Citigroup precisely what Mr. Grubman did to earn his $20-million-a-year compensation and his $32 million departing gift. Besides, that is, filling Salomon's coffers with telecom underwriting fees, an achievement that confirmed how conflicted Mr. Grubman's interests and Citigroup's have been.

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