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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 claiming that all of the allegations are true. The intention is to show the general thrust of corporate practices as well as the nature 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.

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.


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

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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.

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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.

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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.

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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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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 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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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 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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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.

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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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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.

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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 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.

  1. The deception of the public by analysts and bankers described above. This lay at the heart of the market bubble.
  2. The bribes and kickback arrangements with corporate executives known as "spinning" to secure their loyalty and support
  3. The exploitation of employees when advising and trading their options
  4. The fraud perpetrated by the corporations when they were unable to meet the inflated expectation of the marketplace on whose support they depended
  5. 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
  6. 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


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

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 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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This page created January 2004 by Michael Wynne