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Financial

Grubman Was Right!

After swimming through some of the evidence put on display last week by New York Attorney General Eliot Spitzer's office, you can't help but tip your hat to Jack Grubman.

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.
Today Focal continues to work on its reorganization and the chore of making itself less... well, hammy. The company did not respond to a request for comment.

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

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opticalweenie 12/5/2012 | 12:05:16 AM
re: Grubman Was Right! Oooooo Phil,
You are really going to confound Booby now!
But then again, using the word "hammy" in the
preceding paragraph might atone for your pusillanimous sin. Such juxtapositioning, what
are you aiming for a pulitzer?
Weenie
puddnhead_wilson 12/5/2012 | 12:05:16 AM
re: Grubman Was Right! Never. The VCs were not employed as investment advisors, expected to give some approximation of honest advice to the general public.
KPSmells 12/5/2012 | 12:05:16 AM
re: Grubman Was Right! the vulture capitalists on Sand Hill Road who committed as many and as severe crimes as Grubman, Weil, and others...The conflict of interest along with pump and dump started because of the vulture VC's on Sand Hill.

Elliot Spitzer, please HELP!!!!
road__runner 12/5/2012 | 12:05:15 AM
re: Grubman Was Right! Some of them have straddled the boundary between investor and analyst without appropriate disclosure of interests which is clearly wrong and fair game for investigation.
whyiswhy 12/5/2012 | 12:05:13 AM
re: Grubman Was Right! http://www.lightreading.com/bo...
KPSmells 12/5/2012 | 12:05:12 AM
re: Grubman Was Right! Oh Please!!! Sequoia Capital sat on the board of Cisco and pushed Cisco to keep buying Sequoia backed laemo companies. That diluted public investors and ultimately caused cisco stock to crash. This is clear conflict of interest!! And Cisco/Sequoia isnt alone in this. Most of the SandHill Road VC's need to be investigated by SEC and the AG.
single mode figure 12/5/2012 | 12:05:11 AM
re: Grubman Was Right! It is interesting to note that Frontline always parts the cover of mystery about all sorts of fascinating topics, none of which ever come to any prosecution.

I think that Sandy, Jack and Bernie deserve to have their lives extended a thousand years so they can get around to spend their wealth, unfortunately mortality requires we all meet the reaper, that levels the playing field.
cruzexpo 12/5/2012 | 12:05:09 AM
re: Grubman Was Right! Everybody knows the law is different for the wealthy. Prosecutors build their careers on poor drug offenders who can't afford hot-shot lawyers. And did you really expect the Spitsmeister to rock the Wall-Street Casbah? No way, too much schmooze involved.
single mode figure 12/5/2012 | 12:05:06 AM
re: Grubman Was Right! AMAN TO THAT! Justice in the usa is bought and paid for through judges and their lawyer running dogs.

Every revolution starts by hanging the legal system with piano wire.
billy_fold 12/5/2012 | 12:05:05 AM
re: Grubman Was Right! Grubby got off with a slap on the wrist. Case closed.

-billy
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