Jack Grubman Goes
Jack Grubman flew high with the rise of telecom giants like WorldCom Inc. (OTC: WCOEQ), Global Crossing Holdings Ltd., and Qwest Communications International Inc. (NYSE: Q), but has recently seen his career deflate almost as quickly as the industry bubble itself. Late yesterday afternoon, Jack Grubman resigned from Salomon Smith Barney.
Unlike people who lost money in the faltering telcos as they plunged towards bankruptcy, however, Grubman has a mattress stuffed with cash to cushion his fall.
During the boom years, Grubman made as much as $20 million a year. According to a Financial Times report today, his severance package with Salomon Smith Barney is worth $32 million. The deal apparently calls for Citigroup to pay Grubman $1.2 million over the next year and a half and to cash in his options, paying him another $12 million. The company has also agreed to forgive a five-year loan it made to the analyst in 1998, worth $19 million. Salomon Smith Barney did not respond to requests for confirmation by press time.
Once the star of Wall Street, some say Grubman is now taking the fall for the failure of an entire industry.
“Although [Grubman], along with many other experts in the industry, did not anticipate the collapse of the telecommunications sector,” Michael Carpenter, the head of Salomon Smith Barney, wrote in a memo to all Salomon and Citigroup employees yesterday after accepting Grubman’s resignation, “we believe that… he always wrote what he believed and conducted himself professionally and in accordance with legal and ethical standards.”
Salomon Smith Barney, of course, pulled in nearly $80 million from Grubman’s star client, WorldCom, alone. But shareholders who lost money following the analyst’s advice may not be sympathizing. Grubman is facing several shareholder lawsuits claiming that he helped pump up the value of the companies he covered (see WCOM Buyers Sue Analysts and Lawsuits Mount for GlobalX Analysts). The analyst is also facing federal probes and an investigation by New York Attorney General Elliot Spitzer.
Grubman’s close ties to the management at the companies he was covering -- as well as the astronomical fees he generated for his employer and himself -- have put him on the list of Wall Street honchos being investigated by the government. His relationship to scandal-ridden carrier WorldCom is viewed as especially suspect (see WorldCom's Grubby Secrets and WorldCom Finger-Pointing Begins ). Grubman admitted during a congressional hearing last month that he had attended three WorldCom board meetings during the time he was advising the company's directors on banking transactions. He also acknowledged that his compensation was indirectly influenced by the investment banking deals his company won.
So what's his record in covering WorldCom, among others? During the time Grubman had a Buy rating issued on WorldCom, for instance, the company’s shares fell more than 90 percent. The analyst didn’t drop the rating from Buy to Neutral until April 22 this year -- only days before the ousting of former WorldCom CEO Bernard Ebbers.
Grubman ceased coverage of WorldCom last week (see Grubman's Last WorldCom Call).
Testifying before Congress last month, Grubman said: “I certainly have made mistakes. In retrospect, I regret staying with my point of view for too long. For most of last decade, I was right and I was roundly praised, and now I’ve been wrong and am roundly criticized.”
Grubman continues to defend his track record. “I did my work as an analyst within a widely understood framework consistent with industry practice that is now being second-guessed,” Grubman wrote in his letter of resignation addressed to Carpenter yesterday. “The relentless series of negative statements about my work, all of which I believe unfairly single me out, has begun to undermine my efforts to analyze telecommunications companies. This constant barrage of unsubstantial, negative reports has also obviously made it personally very difficult for me to do my work, and has caused my family great pain.”
— Eugénie Larson, Reporter, Light Reading