Posted on 04/29/2003 2:41:58 AM PDT by Liz
Moving decisively to prevent bias in future research reports, the regulatory settlement announced yesterday bars Sanford I. Weill, chairman of Citigroup, and other senior officers from talking to Citigroup's research analysts on investment banking matters without a company lawyer present.
By highlighting Citigroup executives, regulators and prosecutors demonstrated their determination to stymie conflicts of interest within the investment bank's sprawling operations.
The restrictions, which Citigroup officials agreed to, are also the legacy of an unorthodox campaign by Mr. Weill, spelled out in previously undisclosed detail, to persuade Jack B. Grubman, his star telecommunications analyst, to change his rating on AT&T's stock from neutral to positive. Mr. Grubman had a neutral rating — Wall Street code for negative — on the stock from 1995 to November 1999, at which time he issued a new report with a positive rating.
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.
Mr. Weill accompanied Mr. Grubman to meetings with C. Michael Armstrong, then the chief executive of AT&T, and asked that Mr. Grubman's AT&T report be sent to him, before its publication, e-mail messages show.
Such a close interaction with an analyst is unusual and might open Mr. Weill and other Citigroup executives to future claims by regulators that they failed to supervise Mr. Grubman, legal experts say — even though Mr. Grubman never reported directly to Mr. Weill.
"The AT&T matter could be pertinent in a failure-to-supervise case, given the interaction between Mr. Weill and Mr. Grubman," said Robert G. Heim, a former Securities and Exchange Commission lawyer now at Meyers & Heim. "If Mr. Weill was aware that Mr. Grubman was basing his recommendations on investment banking considerations, that may make Mr. Weill vulnerable."
Regulators say that a failure-to-supervise complaint is unlikely to be brought solely on the AT&T episode. They do say, though, that it could be used as a relevant example in proving a broader case that Mr. Weill and other senior executives failed, individually, to adequately supervise Mr. Grubman.
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.
"Based upon my knowledge of the record, in the unanimous determination of all regulators, it is unimaginable to me that any supervisory case be brought against Mr. Weill on AT&T or anything else," said Martin Lipton, a founding partner at Wachtell, Lipton, Rosen & Katz and the chief lawyer representing Mr. Weill in the discussions with regulators.
The New York attorney general, Eliot Spitzer, has himself lent credence to that interpretation, saying that Mr. Weill pushed so hard for Mr. Grubman to upgrade AT&T because as a board member and a friend of Mr. Armstrong, he had become a true believer in the company and had even bought the stock himself.
Regulators are using the word "fraud" in claiming that Citigroup issued biased ratings on some stocks in the late 1990's, a finding that civil lawyers are sure to pounce on in pursuing arbitrations and class-action lawsuits on behalf of investors.
But by paying $400 million in fines and payments as part of a larger $1.4 billion settlement with 10 Wall Street firms, Citigroup as a firm can no longer be investigated on banking and research conflicts that occurred from 1999 to 2001.
Individuals at the bank, from analysts up to Mr. Weill, received no such protection.
In a statement released yesterday, Mr. Weill apologized for past business practices and announced that Sallie Krawcheck, the chief executive of Smith Barney, which is now Citigroup's research and brokerage arm, would meet privately with the Citigroup board's compensation, audit and governance committees to review compensation and budget issues for her research division.
"Certain of our activities did not reflect the way we believe business should be done," Mr. Weill said. "That should never have been the case, and I am sorry for that. I have been reminded myself of how the appearance of what we do may be questioned and of how we must take care to ensure that our conduct does not raise such questions."
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.
"Sandy has been a micromanager for 50 years," said Roy Smith, a former partner and a business school professor at New York University. "And there is a consequence to this. The real question is this: can any single firm be active in so many different areas without incurring such conflicts and the resulting litigation."
Mr. Grubman symbolized this inherent conflict: as a research analyst, his primary responsibility was to provide objective research to the firm's institutional and retail clients. 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 — by publishing positive research on them that made him a meal ticket for Mr. Weill.
Mr. Weill and Mr. Armstrong sat on each other's boards and have been good friends since the early 1990's. Mr. Grubman, who worked for AT&T before becoming a Wall Street analyst, had a more complicated relationship with Mr. Armstrong and from 1995 to 1999 kept a neutral rating on AT&T's stock, much to Mr. Armstrong's displeasure.
When Mr. Grubman neglected to mention AT&T as an industry leader in a speech in October 1998, Mr. Armstrong complained to Mr. Weill, who relayed the complaint to Mr. Grubman's superiors. "The last thing I want to do is have AT&T put in an awkward position in dealing with Salomon Smith Barney," Mr. Grubman wrote in a letter to Mr. Weill that was released yesterday. "To the extent I have done so I apologize to you and the firm."
Mr. Grubman was asked by Mr. Weill to take a fresh look at AT&T in late 1998 or early 1999 with the expectation that he might upgrade his rating of the company, documents show.
In August 1999, Mr. Weill and Mr. Grubman met with Mr. Armstrong at AT&T's headquarters in New Jersey.
A few weeks later, Mr. Grubman wrote to Mr. Armstrong, with copies sent to Mr. Weill and Eduardo Mestre, the head of Smith Barney's investment banking division. "When my analysis is complete and if the results are in line with what you and I are expecting, there will be no better supporter than I," he said in the letter. "I would welcome the role of being a kitchen cabinet member to you."
In October, Mr. Weill and Mr. Grubman had a 14-minute conversation in which Mr. Weill asked him once again to take a fresh look at the stock. In November, Mr. Grubman sent a letter to Mr. Weill updating him on AT&T. Throughout the month, Mr. Grubman and Mr. Weill had numerous conversations about progress on his work.
On Nov. 24, Mr. Grubman alerted Mr. Weill to his upgrade, and on Nov. 29 he sent an e-mail message to the publications department saying that "the AT&T report must be edited and mailed out to printers today so that it can be distributed in time to meet Sandy Weill's deadline."
The next day, Mr. Grubman issued his report of AT&T with a positive rating.
In February 2000, Salomon Smith Barney was named a book runner for AT&T's public offering of its wireless company, earning $63 million in fees.
"The AT&T matter could be pertinent in a failure-to-supervise case, given the interaction between Mr. Weill and Mr. Grubman," said Robert G. Heim, a former Securities and Exchange Commission lawyer now at Meyers & Heim. "If Mr. Weill was aware that Mr. Grubman was basing his recommendations on investment banking considerations, that may make Mr. Weill vulnerable."
Grubman and Weill's Machievellian move on AT&T is instructive, and is not the whole story of these two devious manipulators. CBS-TV reported Grubman crowed that they, "played the AT&T chairman like a violin." Grubman and Weill knew exactly what they were doing.
Don't just sit there, Mr Armstrong of AT&T, come forward and tell us what you know. (This oughta be good. Stay tuned.)
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.