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Salomon Smith Barney FraudAlthough a number of Salomon Smith Barney employees are being investigated as parties to fraudulent activities, high-profile analyst Jack Grubman has so far taken the fall. Grubman, who resigned from the company in August of 2002, has been accused of issuing stock advice that ruined investors while he courted investment banking clients. When were accusations of fraud first made? In April of 2002, private investor George Zicarelli filed a civil suit against Grubman and Smith Barney. Zicarelli invested over $450,000 in stock that both his personal Smith Barney broker and Grubman advocated. Both men advised Zicarelli to keep buying, even as the stock’s value plummeted, costing the investor a huge portion of his savings. Zicarelli sued after learning that Grubman had conflicting interests that likely colored the stock pick. Around the same time, an investigation into several Wall Street institutions – including Salomon Smith Barney – was started by New York Attorney General Eliot Spitzer. What type of fraud was committed? The intimacy of Jack Grubman’s relationship with Worldcom executives and other members of the business community make it difficult to determine the complete extent of any deals that he may have struck. However, Grubman and other Salomon employees are believed to have participated in at least two fraudulent practices. First, they are accused of providing executives at companies that were existing or prospective investment banking clients with promising initial public offerings (IPOs) – quick gains for them in exchange for future company deals. These deals are believed to have included former Worldcom CEO Bernie Ebbers. Second, it is believed that Salomon analysts – Grubman in particular – encouraged investors to make poor investments in the stocks of large clients. Again, the primary goal was presumably to garner stock offerings from these companies. These included stocks like Worldcom and Global Crossing – the one recommended to Mr. Zicarelli. What are the most recent developments in cases against Salomon Smith Barney? In September of last year, the National Association of Securities Dealers (NASD) fined Salomon $5 million for misleading investors. In December, a multi-team task force that includes Spitzer and NASD settled with ten top brokerages for $1.4 billion and a new set of regulations for Wall Street firms. The money will go in part to helping the firms institute new practices, such as paying independent researchers whose advice will now appear alongside that of in-house analysts. While it has been suggested that the money should be used to repay investors who suffered from poor brokerage advice, the fine represents only a small portion of what they lost. The new regulations will include several provisions. Investment firms will have to provide investors with independent research alongside their own predictions. The distribution of IPOs to investment banking clients will be strictly monitored to ensure that it doesn’t constitute a bribe. Finally, direct collaboration between researchers and investment bankers has been banned. However, it is still questionable how much these measures will serve to insulate researchers from investment bankers in the same company. |