Bear Left!

Not So Equal Opportunity
Paul Corrigan

Jack Grubman, the former Salomon Smith Barney telecommunications analyst whose face has been splashed on the cover of the Wall Street Journal last week, and Sanford Weill, chairman and chief executive officer of Citicorp, have answered the questions long posed by social scientists: how do the rich get rich and why do they poor stay poor? According to Grubman and Weill, the way to get ahead in life is to work hard and take risks at using your connections and trading your influence. If you do all that, you will succeed in life, whether success means getting your child into the most prestigious preschool or gaining control of one of America's largest corporations.

It appears that Weill used "undue influence" to get total control of the chairmanship of Citigroup. In other words, he cheated. Some would say that he committed securities fraud. At the time, Weill was in competition with co-chairman John Reed for control of the company. Citigroup was the surviving entity of what was then the largest corporate merger ever, the merger of Travelers Inc. and Citicorp in 1998. Reed came to the merger with Citicorp and Weill came from Travelers. To win the support of a key Citigroup board member, AT&T CEO Michael Armstrong, Weill delivered a quid pro quo to Armstrong through his influence with Grubman. To its credit, the Wall Street Journal has done an excellent job of reporting that story.

In 1999, according to emails written by Grubman (the accounts of which were published in the Journal, the Financial Times and the New York Times), Weill pushed Grubman to upgrade the brokerage company's rating of AT&T, which Grubman had rated a "hold." Shortly after Grubman changed the recommendation to "strong buy," AT&T selected Salomon as one of the underwriters of the company's upcoming stock offering. Salomon received over $40 million in fees as a result. A few months later, Grubman lowered the rating back to a "hold." Weill has admitted that he asked Grubman to "take a fresh look" at AT&T just prior to the upgrade, but denies any impropriety.

As a former worker for one of New York's larger investment banking firms, I can attest that none of this came as a shock to me. "Par for the course" is the phrase that comes to mind. The Chinese Wall that supposedly separates the investment banking function from stock research has been a joke for a long time. This type of conflict of interest is commonplace but the story did not end there, and we have Grubman's penchant for writing e-mails to thank. Grubman acknowledged that he upgraded AT&T to help Weill win control of Citicorp. The Journal quotes one email as follows: "Everyone believes I changed my rating to get AWE [the stock offering for AT&T's wireless unit]. But that's not why. Sandy needed Armstrong to nuke Reed."

The next piece of the puzzle is what gave this story even more legs. Grubman admitted in e-mails that the quid pro quo he received was for Weill to use his influence to get Grubman's twins into an Upper East Side preschool, the nursery school at the 92nd Street Y. In capitalism, supply and demand dictate the market. With only 65 openings each year, the 92nd Street Y's nursery school is in short supply and high demand. Grubman, acknowledging his frustration with the process of applying to the preschool, wrote, "it comes down to who you know . . . anything you could do Sandy would be greatly appreciated." The New York State Attorney General uncovered the e-mails during an investigation into conflict of interest charges relating to the undue influence in Salomon's solicitation of investment banking business.

Grubman now claims that he "invented" the story. Sorry, Jack, you're no Thomas Edison. Weill describes charges that he helped Grubman's twins get into preschool as "utter nonsense." He is left, however, to explain how Grubman's children beat the odds and won admission, and to explain why an affiliate of Citicorp gave the 92nd Street Y a $1 million donation in 2000. I remember Smith Barney's old marketing ditty, "We do business the old-fashioned way: we earn it." It's nice to see that Wall Street values preschool education.

Now I understand why the wealthiest Americans need the Bush tax cut and an end to the estate tax. It costs a lot to exercise undue influence.