The evidence, dug up during an investigation of 10 of the nation's largest investment banks, showed that, if nothing else, former Salomon Smith Barney (SSB) telecom analyst Jack Grubman was right about many of the stocks he covered (see Salomon Slammed in Settlement).
For instance, Jack Grubman thought Focal Communications Corp.'s stock was a "pig," according to an email he wrote to a colleague. And he was right. Focal has never reported a profit. Between 1996 and 2000 it reported some $138 million in net losses.
The problem: Grubman and his colleagues consistently urged investors to buy Focal's stock, even when it was clear that the pig was never going to fly. So, while Focal was burning through loads of cash, Grubman and friends were still protecting it, while it paid about $11.8 million in banking fees to SSB, the bank that underwrote the carrier's IPO in 1999.
Here's a snapshot of what Grubman did, and what he hid, regarding Focal...
- April 2000: Grubman's team held a positive rating and a $110 price target on Focal's stock, which was sitting at $34 and falling.
- February 2001: Cracks were becoming apparent in Focal's business plan, but Grubman's team threw its weight behind the stock. They maintained a $30 stock price target on the stock, which was at $15 and still falling. As the CLEC was being squeezed by its competitors and was running out of cash, Grubman and company wrote that the company "continues to gain a stronger foothold in the large business market and continues to grow sales of existing customers..."
Apparently Grubman and his cronies didn't believe a word of their own note. The same day, Grubman wrote to a colleague that "every single smart buysider feels [Focal's stock] is going to zero."
Knowing he was torn between protecting SSB's banking business and protecting investors, Grubman vented that his allegiance to SSB was eroding his reputation. "We lose credibility on MCLD [McLeodUSA Inc.] and XO [XO Communications Inc.] because we support pigs like Focal," Grubman wrote.
- April 2001: Grubman held his nose and again issued positive comments on Focal's stock.
- October 2002: Focal attempted a $430 million recapitalization and tried to minimize its short-term interest payments. That same month, Spitzer's office began publicizing Grubman's email from February 2001.
- December 2002: With its paid yes-men long gone and its cash depleted, Focal filed for bankruptcy and cut 300 workers from its payroll.
Not many are happy with the pusillanimous punishment handed to Grubman and the investment banks after all their years of deceit and misinformation. A full 73 percent of those who have taken Light Reading's Crime and Punishment poll so far say the punishments handed out in the analyst scandal should have been more severe. About 84 percent feel Grubman should face jail time for his actions.
— Phil Harvey, Senior Editor, Light Reading