“Salomon Smith Barney agreed to pay $5 million to settle civil charges that former star analyst Jack Grubman and a colleague touted a stock that they privately questioned in e-mails — strengthening the government’s hand as it pursues a broader case over potential investor abuses that could cost the big securities firm hundreds of millions of dollars,” writes Charles Gasparino in today’s Wall Street Journal.

“The National Association of Securities Dealers, which released the damaging e-mails in alleging that Salomon’s research was “materially misleading,” levied the fine against the unit of Citigroup Inc. for its reports in 2001 on Winstar Communications Inc., a telecommunications company that filed for bankruptcy-law protection last year. Even as Winstar shares traded at pennies on the dollar, Mr. Grubman maintained his ‘buy’ rating — and a $50 price target.”


“In a split with Salomon, Mr. Grubman, 48 years old, and Christine Gochuico, 33, who assisted him with his Winstar research, are fighting the NASD charges. As reported in The Wall Street Journal, Mr. Grubman’s lawyer has made it clear to regulators and prosecutors that his client is willing to discuss the institutional pressures he faced within the firm when investment-banking deals were on the line. Mr. Grubman’s cooperation with investigators could be significant as Salomon launches a major effort to settle the myriad investigations into its research practices.”

“In a statement, Charles Prince, Salomon’s chief executive, said the settlement, in which the firm neither admitted nor denied guilt, is ‘consistent with our determination to do all that we can to resolve the issues’ facing the firm. Mr. Prince said Salomon is looking to soon change parts of the firm’s research process to ensure its ‘quality and integrity,’ though he wouldn’t disclose details because of ‘ongoing litigation.’ “

“Mr. Grubman’s lawyer, Lee Richards, said his client’s opinion on Winstar ‘reflected his honestly held views’ on the company. He said Mr. Grubman’s ‘ratings, price targets and analysis were consistent with the overwhelming majority of other analysts, and emphasized the speculative nature of an investment in Winstar.’ Mr. Richards also noted Mr. Grubman was prevented from downgrading Winstar in early April 2001, just weeks before it filed for bankruptcy protection, by Salomon’s legal department. Robert Romano, Ms. Gochuico’s attorney, said his client’s conduct has been ‘grossly mischaracterized,’ that she is innocent and ‘conducted herself in a totally professional way at all times.’ He added ‘there is nothing in the e-mails that is at odds with the firm’s published research.’ Ms. Gochuico is still with the firm on maternity leave.”

“The NASD action marks one of the few times a U.S. regulatory agency has taken action against a major Wall Street firm for what is fairly common in the industry: issuing overly optimistic research on companies that provide investment-banking fees to the firm.”

http://online.wsj.com/article/0,,SB1032803319720517153,00.html