The scam factor is nowhere near being flushed out. Without confidence, the market goes nowhere, chart blip here and there notwithstanding. And that's not even considering valuations.
BTW, how quickly we forget QCOM.....
WSJ Article, page 1:
NASD Plans to File Charges Against Salomon, Grubman
Administrative Securities-Fraud Charges Stem From Analyst's Touting of Winstar
By CHARLES GASPARINO
Staff Reporter of THE WALL STREET JOURNAL
The National Association of Securities Dealers is preparing to file administrative charges of securities fraud against Salomon Smith Barney and its former telecommunications analyst Jack Grubman, according to people familiar with the matter. The charges would stem from the firm's positive research reports on Winstar Communications Inc., a telecommunications company that filed for bankruptcy-law protection last year, these people said.
The NASD's enforcement arm has notified lawyers for the big securities firm and Mr. Grubman that it could file an administrative case as early as Monday, though negotiations are continuing and the situation could change, these people say. Salomon may be able to persuade the NASD to settle on lesser charges amid the continuing negotiations.
The NASD has focused on whether Mr. Grubman misled investors by touting shares of Winstar, one of Salomon's investment-banking clients, amid evidence that the company was in deep financial trouble, people familiar with the matter say. Mr. Grubman had been a vociferous bull on the stock for several years, and he continued to support the company in his research even as evidence began to emerge in early 2001 about Winstar's financial problems.
Any NASD civil action would mark the first major case by federal securities regulators investigating whether big securities firms obtained investment-banking business by making overly optimistic stock picks. Charles Prince, Salomon Smith Barney's new chief executive, met Thursday with Mary Schapiro, head of the NASD's regulatory division, to discuss the Winstar case, people familiar with the meeting say. Mr. Prince is intent on settling the matter as soon as possible, these people say.
The moves signal that Citigroup Inc. and its Salomon Smith Barney unit are aggressively seeking to put a number of regulatory woes behind them. On Thursday, Citigroup, the nation's largest financial-services firm, agreed to pay $215 million to settle federal charges that a company it acquired manipulated as many as two million people into buying overpriced mortgages and credit insurance before the Citigroup purchase. And Mr. Prince, in his first major initiative as Salomon's chief, has been attempting to reach an overall settlement with regulators and prosecutors examining a number of alleged abuses that have dogged the firm for months.
'Global Settlement'
Next week, Mr. Prince is slated to meet with NASD officials and Stephen Cutler, the Securities and Exchange Commission's enforcement chief, in a bid to arrive at a "global settlement" of all federal regulatory matters involving Salomon. The various inquiries involve allegations that the firm used hyped research to win investment-banking deals and handed shares of hot initial public offerings to corporate executives as a way of winning lucrative banking assignments, misleading small investors in the process.
A spokeswoman for Salomon would say only that the firm is cooperating with the various investigations but added that the firm had "no intent to mislead investors" regarding its Winstar research. NASD and SEC regulators declined to comment. A lawyer for Mr. Grubman, who was ousted from Salomon last month, also declined to comment.
At the same time, Salomon has begun settlement talks with the office of New York State Attorney General Eliot Spitzer, which has launched the most far-reaching probe into conflicts of interest involving the firm's research and other matters, these people say. The Spitzer investigation is potentially the most problematic for Citigroup: In addition to investigating whether Mr. Grubman hyped research on telecom stocks to win investment-banking deals, Mr. Spitzer also is examining the role played by senior executives at the firm. Salomon may have to pay as much as several hundred million dollars to settle the Spitzer inquiry, the people say.
Mr. Spitzer's office, meanwhile, also is investigating whether the firm improperly doled out IPOs to senior executives whose companies did business with the securities firm. Indeed, people close to the inquiry say Mr. Spitzer is considering ways to force corporate executives who have improperly received IPO allocations to "disgorge" some of the gains back to investors. It isn't clear how such a process would work.
If the NASD proves its securities-fraud allegations, it could levy a wide array of sanctions against Mr. Grubman, including millions of dollars in fines and other penalties such as suspension, or a prohibition, from the securities industry. The firm also could face certain sanctions.
There is a potential downside for Mr. Prince in the Spitzer investigation. Mr. Grubman's lawyers have made it clear that the former research star is willing to cooperate. They also point out the pressures placed on analysts by investment bankers and other executives to influence stock ratings when lucrative investment-banking deals are on the line.
Indeed, the NASD's investigation of Salomon's actions involving Winstar, which was involved in Internet and wireless connections, reflects how the case has broadened beyond Mr. Grubman. And it suggests how the former star analyst's cooperation could help the regulatory agency examine the firm's role in possible conflicts of interest involving research work.
In testimony to NASD investigators, Mr. Grubman has said that he wanted to downgrade Winstar's stock in early April -- around the time some of his competitors were slashing their ratings -- but was prevented from doing so by Salomon's compliance office, which oversees legal and corporate policy, a person familiar with the matter says.
NASD officials are investigating why the firm would prevent such a move, the people familiar with the matter say. Some people close to the inquiry speculate that Citigroup's commercial-banking unit may have had an outstanding loan with Winstar or was structuring one as the company hit rough times. A Salomon spokeswoman declined to comment.
In a sense, Citigroup already has paid a big penalty amid the various allegations involving its business practices during the stock market bubble of the mid- to late-1990s. This year, the market value of the financial-services giant has declined by nearly $120 billion, or about 45%, as investors have questioned Citigroup's business model of combining corporate lending, investment banking, research and brokerage services for small investors under one roof.
Managing conflicts at such a wide-ranging conglomerate has proved difficult. This predicament was highlighted by Citigroup's work with Enron Corp., the Houston-based energy giant whose December bankruptcy-law filing triggered a spate of disclosures of corporate malfeasance. Citigroup, like some other financial-services firms, worked as Enron's lender, underwriter and adviser, among other roles.
Congressional investigators believe that Citigroup helped Enron hide billions of dollars in debt from investors and ratings agencies through a complex series of transactions. Citigroup officials deny that the firm did anything wrong.
Meanwhile, separate inquiries by Mr. Spitzer's office and the NASD concern Salomon's research practices involving a broad array of telecommunications firms, and whether senior Salomon officials allotted hot IPOs to corporate executives running these companies as a way of winning lucrative investment-banking business. Much of this line of questioning surrounds the research of Mr. Grubman, once one of the highest-paid analysts on Wall Street.
Mr. Grubman was initially at the center of the various probes, but in recent weeks officials in Mr. Spitzer's office, as well as NASD investigators, have shifted their emphasis, people familiar with the matter say. Now, investigators are looking more broadly at whether Citigroup's various businesses create conflicts that put small investors at risk.
"Conflicts of interest are rampant at Citigroup," asserts Jacob Zamansky, a lawyer who has filed an arbitration claim against the firm and Mr. Grubman over its research. "If a firm like this has to choose between a big corporate client that provides huge investment-banking fees, and a small investor who doesn't, the investor will always lose."
-- Anita Raghavan contributed to this article.
Write to Charles Gasparino at charles.gasparino@wsj.com
Updated September 20, 2002 12:02 a.m. EDT
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