Rainmaker in a Firestorm
In the second half of the 1990s, Salomon Smith Barney analyst Jack Benjamin Grubman may have been the most influential person in the telecom industry. The onetime boxer from a blue-collar neighborhood in Philadelphia had risen to become the sector's power broker, helping startups raise millions, persuading investors to bid up stock prices and even counseling CEOs on strategy and acquisitions. Between 1998 and 2000, Grubman helped Salomon raise $53 billion for telecom players, more than any other firm on Wall Street, according to Thomson Financial.
That's ancient history now. Today the question is whether Grubman can hold on to his job and avoid serious legal trouble. Investors are furious that the stocks he promoted have collapsed. New York Attorney General Eliot Spitzer is investigating whether Grubman's stock recommendations were compromised by banking fees Salomon received from telecom players. And on Apr. 30, his highest-profile client, Bernard J. Ebbers, stepped down as chief executive of embattled WorldCom Inc. (WCOM ) "Will Salomon keep him around?" asks one money manager. "I can't imagine it."
Salomon is standing behind its fallen star. "Jack has and will continue to play a key role within our research division," says Kevin McCaffrey, Salomon's director of U.S. equity research. And he has some support among executives and money managers with whom he forged close ties during the early days of the telecom boom. When Jeffrey Heil, director of equity investments at the Regents of the University of California, began following telecom in 1994, Grubman spent five hours giving him what Heil calls "Telecom 101." Says Royce J. Holland, chief executive of upstart Allegiance Telecom Inc.: "Jack is just as smart today as he was two or three years ago."
Still, the heat is intensifying. While many Wall Street analysts missed the downturn, Grubman was in a category all his own. At least 10 telecom players he recommended have filed for bankruptcy, including Global Crossing Ltd. WorldCom, which he rated a buy until Apr. 22, has seen its stock drop 95%, to $2.50. Says one money manager: "I don't think anybody's been listening to him for the past six months."
More than others, Grubman was a player in the industry he covered. He counseled SBC Communications Inc. (SBC ) on its Ameritech acquisition in 1998. He helped Ebbers launch a hostile bid for MCI Communications in 1997. And Grubman recruited Joseph P. Nacchio, then a top AT&T exec, to become chief executive of Qwest Communications International Inc. (Q ) in 1996.
Grubman was up front about his role. "What used to be a conflict is now a synergy," he explained in a BusinessWeek profile two years ago. "Someone like me who is banking-intensive would have been looked at disdainfully by the buy side 15 years ago. Now they know I'm in the flow of what's going on." That's for sure: Grubman was paid about $20 million annually, compared with $1 million to $2 million for the typical Wall Street analyst.
But now, investors are questioning whether Grubman's stock picks were compromised by his deep involvement with the companies he covered. He already has been hit with one arbitration claim filed with the New York Stock Exchange on behalf of a Global Crossing investor. And more trouble may lie ahead. In April, Spitzer subpoenaed Salomon Smith Barney, requesting documents related to Grubman's research and the fees he received from his investment banking activities. But unlike the alleged duplicity found in the Merrill Lynch & Co. (MER ) e-mails, Grubman argues that he truly believed in the stocks he recommended, even if he was wrong.
Despite Grubman's troubles, Salomon has one strong motivation to keep him on staff. The firm doesn't want to create an enemy who could help in any investigation into the firm. If Grubman is ousted, he could have more incentive to point the finger at Salomon, detailing, for example, any alleged pressures on analysts from sales or investment banking. But even if he keeps his job, Grubman's days as the industry's power broker may well be over.
By Peter Elstrom in New York