Jack B. Grubman, the telecommunications analyst at Salomon Smith Barney, is under scrutiny by a US attorney in the Southern District of New York and is also under investigation by the National Association of Securities Dealers, according to an industry official close to the investigation.
Grubman, who attracted more investors to shares of start-up telecommunications companies than any other Wall Street analyst, has been under investigation for months by Eliot L. Spitzer, the New York attorney general. He has also been the subject of numerous lawsuits by investors who contend that he misled them with his relentlessly upbeat reports about the industry even as the companies in it were plummeting in value.
The subject of the NASD investigation is a series of upbeat research reports that Grubman wrote about Winstar Communications, which filed for bankruptcy last April. The investigation, reported Monday in the Wall Street Journal, was made public on Grubman's regulatory record, which is administered by the NASD, on Thursday. The record said that the association's enforcement division had made a preliminary determination that violations of securities regulations occurred in Grubman's research on Winstar. A spokeswoman at the NASD declined to comment on the investigation.
An investigation of Grubman by the NASD could be a significant source of information for others investigating him. Under NASD rules, Grubman can be compelled to testify because there is no Fifth Amendment right against self-incrimination in the regulator's proceedings. If he refuses, he can face severe sanctions. The securities association often shares its findings with law enforcement agencies.
A spokesman for the US attorney's office declined to comment.
According to the securities industry official close to the investigation, the NASD is interested in reports that Grubman wrote about Winstar last year and whether the optimism in those reports was reasonable or reckless. Other inquiries focused on Grubman, like the one being led by Spitzer, are examining whether his research was tainted by his involvement with Salomon's investment bankers.
Grubman began advising Salomon clients to buy Winstar shares in January 1998, when the company's shares were trading at about US$20. He assigned the stock a US$71 price target. Whenever the stock weakened, Grubman would reiterate his buy rating. On March 27, 2000, just after the peak in the Nasdaq, Winstar reached its closing high of US$64.88 a share.
On March 8, 2001, Grubman reiterated his buy recommendation and a US$50 price target on its shares, which were trading at just under US$10. The next month, Winstar sought bankruptcy protection. He stopped covering Winstar on April 27, 2001, just after the company's shares were delisted from NASDAQ. At that time, Winstar's shares traded at US$0.14.
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