Did Sandy Play Dirty?

By Daniel Kadlec

He's not corrupt, Jack Grubman says; he's just a liar and a braggart. A former star analyst of telecom companies for the Salomon Smith Barney unit of Citigroup, Grubman says that when he upgraded his investment opinion of AT&T in November 1999--after years of dissing the stock--it had nothing to do with winning investment-banking fees for Salomon, helping his boss Sanford Weill survive a power struggle or getting the Grubman twins into an exclusive nursery school. A string of emails in which he raised all these issues--and which were obtained by reporters last week--are "baseless," invented by him "to inflate my professional importance," Grubman asserted in a written statement.

You can't simply dismiss that defense. Grubman, 49, has spent much of his life puffing up his image. He has lied about his schooling and which Philadelphia neighborhood he grew up in. At the height of the telecom bubble, he saw himself less as a stock analyst than as a power broker, socializing with CEOs, including WorldCom's Bernie Ebbers, and offering them advice. But the newly obtained e-mails, brought to light in New York State attorney general Eliot Spitzer's probe of conflicts of interest on Wall Street, are being taken seriously by those investigating Grubman. The e-mails fit squarely into a familiar pattern of greed and influence peddling, and now the picture is far more vivid.

We have known for a while that analysts duped investors, advising them to buy stocks that the analysts privately felt should be avoided. Such cheerleading helped the analysts' investment-banker colleagues win lucrative stock-underwriting assignments and boosted the annual bonuses of both bankers and analysts. What's new is the appearance that Grubman and perhaps Weill abused their power to gain the upper hand in such personal matters as gaining entrance to the right school or winning the support of a director in a boardroom coup.

Grubman, who was paid $20 million a year at his peak, said in an e-mail to a friend that he upgraded his opinion of AT&T so that his ultimate boss, Citigroup's then co-CEO Weill, would help him "get my kids in 92nd St. Y preschool (which is harder than Harvard)." Unlike the Y associations in most cities, this one, located on Manhattan's wealthy Upper East Side, charges as much as $14,400 a year for kids ages 2 1/2 to 5, some of whom get picked up after class by chauffeurs. The school has just 65 openings a year, for which it interviews 300 children and their parents. Woody Allen, Michael J. Fox, Kevin Kline and Sting have sent their kids there. In 1999 the New York Observer reported that Madonna's little girl Lourdes was turned down.

Grubman, the only son of a Philadelphia boxer turned city worker, wanted his kids to have the best, and made that plain in a Nov. 5, 1999, memo to Weill. "For someone who grew up in a household making $8,000 a year and attended public schools, I do find this process a bit strange, but there are no bounds for what you do for your children," Grubman wrote.

Weill made a call on Grubman's behalf and pledged a $1 million donation from Citi to the 92nd Street Y. Linking that support to Grubman's upgrade of AT&T stock is "utter nonsense," Weill says. Yet last week Weill acknowledged for the first time that he had asked Grubman to "take a fresh look" at his neutral rating on AT&T just before Grubman turned bullish and AT&T awarded Citi a nearly $45 million investment-banking job taking public the company's wireless division. Investigators are interested in that link and the possibility that Weill sought Grubman's upgrade to win favor with AT&T CEO Michael Armstrong, who sits on Citi's board. In an e-mail , Grubman said that Weill needed the support of Armstrong to "nuke" Weill's then co-CEO John Reed and gain full control of the company. Says Weill: "I would never attempt to manipulate a board member's vote."

Grubman's I-made-it-all-up defense severely undermines his credibility at a moment when he's entangled in multiple investigations and lawsuits. "Mr. Grubman is what you'd call a third-class witness," says Alan Bromberg, a securities-law professor at Southern Methodist University. "Who's going to believe him?"

Just a couple of years ago, Grubman's word was gold. His "buy" rating on a telecom stock would send investors rushing to own it. But when favorite Grubman stocks like Global Crossing, WorldCom and Winstar began to slide in 2000, so did Grubman's clout. He has come to embody everything that went wrong on Wall Street in the late '90s, as it blended investment advice with investment banking. That mix was long taboo, yet Grubman brazenly played both roles and once boasted that "what used to be a conflict is now a synergy."

Business associates and colleagues describe Grubman, who occupied an outsize corner office at Salomon's lower Manhattan headquarters, as generally quiet and focused, with few friends, though he would often hog the stage during conference calls. Says a former Salomon analyst: "We'd all just groan. Nobody had the clout to tell him to stop."

Grubman was a math whiz in high school and was a member of the debate team, marching band and National Honor Society. He listened to heavy metal and at parties would rip phone books in half to impress the girls. Proud of his father's brief boxing career, he would often cock his arm and make ready to land a punch on your jaw, says a former classmate, Jacob Zamansky. Grubman's first job was in strategic planning at AT&T. He later became an analyst at PaineWebber but made his name at Salomon pounding the table for WorldCom in the mid-'90s, with the stock trading in the teens. As it rose to its high near $62 in 1999, so did Grubman's reputation, and his relationship with Ebbers got downright cozy--Grubman even attended Ebbers' wedding that year. "Grubman was solicitous, fawning, like a groupie," says a source close to the WorldCom board. "This was not a natural friendship." And as Grubman's star rose with Ebbers', so has it fallen just as quickly. --With reporting by Julie Rawe/New York

With reporting by Julie Rawe/New York