NEW YORK (CNN/Money) -
The National Association of Securities Dealers fined Salomon Smith Barney $5 million Monday and filed a complaint against former Salomon analyst Jack Grubman for issuing misleading research reports on Winstar Communications Inc.
The NASD, an industry association that includes a majority of securities firms, said it had also filed securities charges against Grubman's former assistant, Christine Gochuico.
NASD said Gochuico and Grubman wrote reports in which they continued to recommend investment in Winstar -- a broadband telecommunications services provider that filed for bankruptcy last year -- and maintained a stock-price target of $50 per share, even as Winstar stock plunged from $20 on Jan. 25, 2001, to 14 cents on Apr. 17, 2001.
"What occurred in this case was a serious breach of trust between Salomon and its investors," said Mary L. Schapiro, NASD's president of Regulatory Policy and Oversight, said in a statement.
In the settlement, the third-largest in NASD history, Salomon agreed to findings that it did not have a reasonable basis for Grubman's target price on Winstar. But the bank neither admitted nor denied any of the NASD's findings.
"We are determined to take a leadership position in establishing higher standards for Wall Street research," Chuck Prince, CEO of Citigroup (C: up $0.70 to $27.53, Research, Estimates), Salomon's parent company. "We are continuing to review our policies and procedures and, in the near future, we will announce some additional changes to ensure that the quality and integrity of SSB's research consistently leads the industry."
The NASD said its settlement does not address other ongoing NASD investigations into research analysis issues at Salomon.
Grubman left Salomon earlier this year with a $32.2 million severance package.
Federal and state regulators are investigating the research analysis of Salomon and several other Wall Street banks. Investigators believe banks were inclined to issue favorable appraisals of companies with which they had banking relationships.
Earlier this year, Merrill Lynch agreed to pay $100 million to settle charges brought by New York State Attorney General Eliot Spitzer that its analysts had recommended stocks they disparaged in private e-mails.
Salomon received fees from Winstar of about $24 million between February 1999 and July 2001, the NASD said. The bank helped Winstar raise more than $5.6 billion, the NASD said, and continued to help it even after it filed for bankruptcy.
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The NASD said Grubman and Gochuico worked closely with Winstar management, consulting them and seeking their approval before issuing research reports. The reports they filed failed to adequately disclose the risks of investing in Winstar and misled investors by mocking other analysts who questioned Winstar's viability, according to the NASD.
The NASD said that, in internal e-mails, Grubman and Gochuico discussed the risks associated with Winstar and their doubts that the company could raise money.
According to the NASD, Grubman said in May 2001 internal e-mail, "If anything, the record shows we support our banking clients too well and too long."
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