As the latest in a long line of Wall Street morality plays, the one involving Sanford I. Weill, the chairman of Citigroup, and Jack B. Grubman, his firm's former star telecommunications analyst, is unfolding in depressingly familiar fashion. But it differs too from some other dramas involving brokerage firm titans: Thousands of individual investors lost millions of dollars because of what appear to have been self-interested actions by Grubman and Weill.
The story so far: In early 1999 Weill asked Grubman, a man whose job it is to monitor by the minute what is happening at telecom companies, to "take a fresh look" at AT&T. Grubman, who had been negative on the stock, coincidentally upgraded it to a buy in November 1999. A few months later, Weill's firm helped AT&T sell shares in its wireless division to investors, reaping bountiful fees. And Grubman got help from Weill securing spots in a prestigious Manhattan nursery school for his twins. In October 2000, Grubman downgraded the shares again after the stock had lost 50 percent of its value.
Recall past Wall Street shows. The infractions and hubris of Michael Milken at Drexel Burnham Lambert in the 1980s did not wipe out armies of small investors. And individual investors were largely unaffected by the attempt of a Salomon Brothers trader to corner the market in US Treasury securities, a power play that cost John H. Gutfreund, the firm's chairman, his job in 1991.
Weill said last week that he did not mean to pressure Grubman into changing his view on AT&T, and that he assumed Grubman would rate the stock on its merits. But his argument is unpersuasive.
The fact is, Weill's request of Grubman draws him into the circle of people that investors can consider at least partly responsible for losses they incurred by following the analyst's advice. Between his upgrade of AT&T when the stock was at US$57.43, and his downgrade, at US$28.88, some US$80 billion in market value vanished.
Grubman was not the only analyst who was bullish on AT&T in 1999. This column quoted one in May 1999 who incorrectly projected a positive future for the company and its shareholders. What a bad call of mine that was.
It may not come as a surprise to people on Wall Street or those accustomed to its ways, that Weill inserted himself into the research process relating to AT&T. But that doesn't mean it looks good. In fact, it looks awful. Sufficiently so that some large investors have dumped Citigroup shares as a result.
Bill Dierker, vice president of equity securities at Nationwide Insurance in Columbus, Ohio, said he had sold the last of his company's roughly 1.5 million Citigroup shares last Wednesday. That was two days after Weill owned up to contacting Grubman about his AT&T rating.
Dierker's reason? "The quality of management is a big variable in my decision-making process and Citigroup went from having a reasonable score to having a low score," he said. "For investors, it used to be we didn't know what we didn't know. Now, I think there's a sense that there's a lot we don't know."
Weill's position at the top of Citigroup may yet be secure. But his legacy as a share manager has been severely damaged.
Bill Fleckenstein, president of Fleckenstein Capital in Seattle, said the incident 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 CEOs did, too."
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