Analyst’s Global Crossing Ties Accentuate Concerns

Details about the unusually cozy relationship between Wall Street’s star telecommunications analyst and Global Crossing Ltd. sent shock waves Friday through an industry already struggling to regain credibility amid charges of rampant conflicts-of-interest.

Salomon Smith Barney analyst Jack Grubman, once the highest-paid industry researcher on Wall Street, was in constant contact with Global Crossing’s chairman for years. He wielded such clout that he had a hand in the hiring of former Chief Executive Bob Annunziata, and in the company’s negotiations to buy Frontier Corp. and U.S. West Inc., according to sources and a published report.

Although none of Grubman’s alleged actions appear to break any laws, they highlight concerns that certain powerful analysts had a larger role than previously thought in shaping the dramatic rise of little-known companies during the market boom of the 1990s. And they may have been too involved in stirring up new investment banking deals to produce objective research reports for investors.

Grubman was an enthusiastic Global Crossing backer and maintained a “buy” rating on the stock during its long fall and downgraded the stock only two months before the company filed for bankruptcy protection.

Also Friday, it was revealed that the top U.S. financial regulator is pursuing 10 investigations of possible conflicts of interest by analysts. Rep. Edward J. Markey (D-Mass.) said Securities and Exchange Commission Chairman Harvey Pitt informed him of the probes, as well as 37 pending enforcement inquiries by the self-regulatory organizations supervising major stock exchanges.

Markey said the allegations include investment banking conflicts with analysts, which was the focus of New York Atty. Gen. Eliot Spitzer’s landmark investigation of leading brokerage Merrill Lynch & Co. Some of the probes involve analysts allegedly trading stocks they covered and, in one instance, an analyst allegedly being paid by an issuer of stock.

Merrill settled with Spitzer’s office for $100 million and initiated reforms aimed at keeping research independent from investment banking, which can be a lucrative source of income for brokerages. Other brokerages such as Citigroup Inc.’s Salomon have pledged similar changes.

Darren Dopp, spokesman for the New York attorney general’s office, said the Grubman “revelations interest us greatly,” but added that it’s too soon to tell whether they will play a key role in Spitzer’s continuing probe.

The accounts involving Grubman, first made public in the Wall Street Journal, paint a picture of ineptitude at Global Crossing, which rose to be worth more than $54 billion but fell hard after spending billions building a worldwide fiber-optic network. The firm, more than $22 billion in debt, filed for bankruptcy protection Jan.28.

Grubman built such a strong relationship with Global Crossing Chairman Gary Winnick that he and Salomon had a role in all of Global Crossing’s deals and stock offerings, from the company’s initial public offering to various merger deals and bond offerings.

Sources said Grubman’s influence at Global Crossing eclipsed that of John Otto, Salomon’s lead telecom investment banker.

“Gary was on the phone with Jack all the time,” said a person involved in the situation who did not want to be identified. The relationship grew so tight that at a glitzy dinner at Claridge’s Hotel in London, Winnick seated Grubman with him at the lead table, along with then-Defense Secretary William S. Cohen and former British Prime Minister Margaret Thatcher.

“I’ve got to say that the particulars are pretty surprising,” said Susan Kalla, an analyst at Friedman Billings Ramsey who was among the first to doubt the viability of many upstart fiber networkers. “It’s just frightening that someone running a multibillion-dollar business would trust the judgment of an analyst that, by definition, has such different motivations.”

Salomon executives declined to comment Friday.

A spokesman for Winnick declined to discuss specifics of Winnick’s relationship with Grubman.

Securities lawyers said the Grubman allegations will help them press arbitration cases or class-action suits against Salomon and other brokerages.

“It shows that Jack Grubman is the king of the conflicted analysts, basically serving as an investment banker and as a financial advisor to the company, none of which was disclosed to investors,” said Jacob Zamansky, a lawyer representing an investor who claims to have lost his life savings of $455,000 by following Grubman’s advice.

In early May, the SEC signed off on reforms proposed by the self-regulatory agencies aimed at stemming widespread conflicts. Among other things, the rules prohibit analysts from promising or threatening to withhold favorable research to induce investment banking business from companies, and bar firms from linking analyst pay to a specific banking deal.