Confessions of a Wall Street Analyst (48 page)

Jack and I were twinned for so many years that I suppose it was fitting that just days after my Wall Street story ended, so, too, did his saga. On April 28th, 2003, Jack settled the SEC charges that had been levied against him without admitting or denying guilt. He agreed to pay a total of $15 million in fines. It was less than half of the severance package he’d collected upon “resigning” from Salomon Smith Barney. In effect, Citigroup shareholders had paid Grubman’s penalty and then some. For Jack, not a bad trade, as they say on the Street.

Though Jack also was censured and barred from working in the securities industry for the rest of his life, he ended up a winner by Wall Street’s rules of maximizing wealth. He netted approximately $17 million simply by
getting fired. His massive legal bills would be paid by Citigroup, and nothing prevented him from setting up a consulting business or even becoming an executive of a publicly-traded company. Indeed, a recent press report says he is attempting to resurrect himself as a telecom consultant.
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Because Spitzer opted not to pursue the Weill connection, we’ll never know for sure what happened on that end.

Jack has said many times, by way of defense, that he was a true believer in this new world, that he honestly did think that demand for bandwidth was infinite, and that it was this misguided belief—not his desire to maximize telecom banking fees or any pressure from the banking side—that led him to be so publicly bullish on stocks.

True? I don’t know. But I see things this way: Jack was so utterly certain that he had the inside track with so many telecom companies that it never occurred to him for a moment that what they told him might not be true. After all, if anyone would know what was going on, it was Jack. He thought he had a special, insider’s relationship with these executives, and many investors thought so too. But the special relationship Jack had with WorldCom is, of course, what ultimately undid him. Without the largest corporate fraud in history, Jack might still be an analyst today, still playing the insider game to the tune of millions. It is just too ironic: the savviest, best-connected guy on the Street turned out to be, apparently, the unwitting dupe in one of the most audacious white-collar crimes ever.

Jack, the most accomplished player of the insider game, was ultimately destroyed by it. He thought he still had the edge—but that edge only mattered when the companies had the juice to pump their stock prices. As the telecom industry unraveled, Jack became just another analyst, a clueless conduit for the desperate mutterings of those who hoped to postpone the inevitable just a little bit longer.

He trusted his “friends.” But with friends like Scott Sullivan and Bernie Ebbers, who needed enemies? In return for his fealty, they burned him. They burned everyone else, too, of course, but they really burned Jack. In the end, he was an outsider after all. The duper had been duped by criminals far more clever than he.

As I packed up my things, I contemplated what I had experienced in my time on Wall Street. I’d come in as an idealist and left a cynic. I was leaving almost exactly when I had planned. But that was probably the only thing that came out exactly as planned. Certainly, I had never imagined that the industry I covered would become so enormous and so central to the world. Nor
could I have fathomed that it would collapse in a whirlwind of scandal, fraud, and overinflated expectations.

Overall, however, I had thoroughly enjoyed most of my time as an analyst. It was more intellectually stimulating and physically exhausting than any job I could have imagined back in my college days, or even in my early stints at MCI and Coopers & Lybrand. But I also had regrets about the job I had done and how I had handled some situations. For example, I should not have played banker, pitching my firms’ investment banking services to Ameritech and AT&T, when the former was being acquired by SBC and the latter was preparing an IPO of its wireless unit.

Nor should I have had as much faith in the SEC as I did. Each time I heard allegations about leaks of inside information or about analysts twisting their stock ratings to serve bankers, not investors, I allowed myself to believe that the SEC (or some other regulatory agency) was already on the trail. Sure, I had heard the SEC was keeping tabs on analysts, even keeping a fat file on Grubman, and that Salomon’s compliance department had investigated him. In retrospect, I should have taken it upon myself to report the leaks I heard about rather than waiting for the regulatory agencies to figure out what was going on. I was far too willing to keep my head down, focusing narrowly on my research and ignoring what appeared to be going on around me.

Finally, my research certainly should have dug deeper into the numbers reported by such companies as WorldCom, Qwest, Global Crossing, and even IDB back in 1994. Catching understated expenses or overstated revenues is not easy. Nevertheless, I should have been more alert to the possibility of financial manipulation and to the corporate and accounting firm cultures that might foster it.

As I walked out of the doors at CSFB onto Madison Avenue for one last time, I shuddered to remember the distinction I’d made between the advertising firms of Madison Avenue, the “street where they fool people,” and Wall Street. I had walked up Madison that summer day in 1989 with great disdain for the inherent fakery of the ad business, especially compared with the empiricism and objectivity of Wall Street research.

Ironically, several Wall Street firms, including CSFB, had since moved to Madison Avenue, where they apparently learned a lot from advertising firms. As I walked up that avenue for the last time as a Wall Street analyst, convincing people to buy a particular brand of soap suddenly seemed like a pretty harmless gig after all. At least it got you clean, and there isn’t enough soap in the world to do that to Wall Street.

Where Are They Now?

As of this writing….

Phil Anschutz
—Anschutz remains chairman of the Anschutz Corp. In 2003, Anschutz settled a suit brought by Eliot Spitzer, alleging improper receipt of IPO shares from Salomon Smith Barney, by paying $4.4 million.
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Since then, he has funded the Oscar winner
Ray,
owns
The San Francisco Examiner
and Los Angeles’s Staples Center, and has stakes in the L.A. Lakers basketball team and the L.A. Kings hockey team. He still owns 18 percent of Qwest, worth about $1.1 billion, not counting the $1.9 billion in Qwest shares he had sold earlier. In contrast to Joe Nacchio, Anschutz was not charged in the March 2005 SEC complaint against five top Qwest executives. He is said to be worth about $5 billion.
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C. Michael Armstrong
—The former AT&T CEO gambled and lost when it came to betting on cable as the future of AT&T. He retired in 2002 after he sold AT&T’s cable operations to Comcast. Today, he remains on the boards of Citigroup, Hospital Corporation of America, and the Parsons Corporation. He’s also taken to academia—he’s a visiting professor at the Sloan School of Management at MIT, and he was recently named to a volunteer
position at Johns Hopkins Medicine that oversees cooperation between the noted medical school and teaching hospitals in Baltimore. He has become a champion of stem cell research. He splits time between Darien, Connecticut, and Naples, Florida, with his wife, Anne.
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Jim Crowe
—The former CEO of MFS has been CEO of Level 3 Communications since 1997.
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He’s still going strong, though Level 3’s stock price has never recovered from its dot-com collapse.

Carol Cutler
—Left the investment profession and is now working at Calvin Klein in Manhattan as a gift registry specialist.

Brady Dougan
—When John Mack was ousted at CSFB in 2004, Dougan stepped in as the new CEO. Unlike Mack, however, he has not been made co-CEO of the parent company, Credit Suisse Group.
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Trying to smooth over the rough edges, he keeps his tie tightened around his neck more often.

Bernie Ebbers
—The former WorldCom chief, convicted of overseeing the company’s $11 billion fraud, was sentenced to 25 years in prison on July 13,2005. If his appeal fails, he will likely spend his remaining days at the federal prison in Yazoo City, Mississippi, about 100 miles from his former home in Brookhaven, Mississippi. Since his sentence is more than 10 years, he did not qualify for placement at Yazoo’s minimum security prison. He will likely be placed in a facility with about 1,750 other inmates. He’ll sleep in a bunk bed with a roommate in a cubicle-like room. He’ll also work seven hours a day, five days a week, as long as he’s medically able, and will be given tasks ranging from food service and plumbing to painting and grounds-keeping. He might have a chance to ride a tractor, one of his passions.
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Ebbers’s wife, Kristie, will be allowed to visit for a minimum of four hours a month.
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Kristie, meanwhile, was allowed to keep a modest home in Brookhaven, $50,000 in cash, and a retirement account—livable, but a far cry from her days as the wife of a billionaire.
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Bill Esrey
—The former Sprint CEO was forced out in 2003 after the IRS raised questions about some tax shelters he used when exercising a large number of stock options. If the IRS requires him to pay up, he could
face substantial tax liability and penalties. Yet Esrey was given a severance package of over $10 million in addition to 10-year memberships in two country clubs as well as office space and secretarial help for the rest of his life.
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Ed Greenberg
—Remains a successful senior telecom investment banker at Morgan Stanley.

Jack Grubman
—Jack is still trying to hustle his vision of the telecom industry. A
Fortune
article described him meeting with small-time paging companies in order to impart his wisdom. While a defendant in numerous class-action lawsuits filed by disgruntled investors, he still maintains a six-story town house in Manhattan’s Upper East Side that he once claimed would be featured in
House & Garden.
He also owns a home in East Hampton, Long Island. The twins graduated from the 92nd Street Y preschool and now attend public school right near the town house.
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On January 24, 2003, a federal court consolidated approximately 80 actions against Salomon Smith Barney, Inc. and Jack Grubman, et al., involving allegations of securities fraud in connection with analyst research reports, into nine lead actions. At this writing, several cases are still pending before the Honorable Gerard E. Lynch, U.S. District Judge, Southern District of New York.

David Komansky
—In the wake of the analyst scandals and subsequent settlements with Spitzer, Komansky pushed up his planned retirement date by a year, handing over the Merrill Lynch CEO post to Stanley O’Neal in late 2002 and the chairmanship in April 2003.

John Mack
—After being forced out of CSFB in a power struggle with his Swiss bosses in 2004, “Mack the Knife” played some golf, briefly took on the role of “point man” in a dissident movement involving disgruntled seat holders on the New York Stock Exchange, and spent less than a month as chairman of a hedge fund. He triumphantly returned to Morgan Stanley on June 30, 2005, taking over from his nemesis, ousted chairman and CEO Phil Purcell, who had alienated the Morgan Stanley bankers.
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Joe Nacchio
—Nacchio is the latest target of regulators, who filed a civil suit against him and six other former Qwest executives on March 15,

2005. The SEC accused Nacchio and the others of a “massive financial fraud.”
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He still lives in Mendham, New Jersey, with his wife, and resurfaced in 2004 as a consultant and even part-owner of BCN Telecom, a small-business telecom firm.
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More than likely, his real job today is to prepare for the most important trial of his life, a trial that could take away from him much of the over $200 million he made by selling Qwest shares between 1999 and 2001. The U.S. Department of Justice has a criminal investigation underway of the fraud at Qwest, which raises the possibility of jail time if Nacchio is charged and convicted.
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Dick Notebaert
—After Joe Nacchio was fired, Notebaert became chairman and CEO of Qwest on June 17, 2002, and remains there today. Qwest made an abortive bid for MCI in 2005.
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Frank Quattrone
—After his first trial ended in a deadlocked jury, Quattrone was retried and convicted of three counts of obstruction of justice, on May 4, 2004.
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He’s likely sitting in his beautiful home overlooking the famed Pebble Beach golf course as he appeals the 18-month jail sentence. A federal appeals court heard arguments in the case July 12, 2005.
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If his appeal fails, Frank will likely serve his sentence in a minimum-security, dormitory-style prison in California, much like Martha Stewart’s famed “Camp Cupcake” in West Virginia.

Bert Roberts
—The former chairman of WorldCom agreed on March 21, 2005, to pay $4.5 million to settle claims against him for his role in WorldCom’s downfall. In an unprecedented move, Roberts and the rest of the board of directors paid a total of $24.75 million of their own money to settle a variety of lawsuits, with the board members’ insurance policies kicking in another $36 million.
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Usually insurance policies cover any corporate director’s liability, but the lead in the class-action suits, New York State comptroller Alan Hevesi, wanted to make an example of WorldCom. The directors, according to Hevesi, each paid about 20 percent of their individual net worth.

Ivan Seidenberg
—Ivan became sole CEO of Verizon in 2002 and was named chairman of the board in 2004.
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In 2005, Verizon agreed to purchase MCI—the former WorldCom.

Eliot Spitzer
—After years of unofficially running for governor of New York, Spitzer made it official in 2005, competing on his record of tackling corporate wrongdoing. Yet most of the cases he pursued were settled. Indeed, after settling with Grubman, he opted not to pursue Weill and other top Wall Street executives in the research scandals. Instead, he pursued high-profile cases against the mutual fund and insurance industries. His office’s one Wall Street prosecution involved a mid-level Bank of America broker, Theodore C. Sihpol III, who was accused of late-trading in mutual funds on behalf of some hedge fund clients. Sihpol was acquitted of 29 counts at trial, including a top count of grand larceny, and the jury deadlocked on four others.
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Shortly thereafter, Spitzer decided not to retry Sihpol on the remaining counts.

Scott Sullivan
—On Aug. 11, 2005, in exchange for cooperating with the authorities in prosecuting Bernie Ebbers, Sullivan received a five-year federal prison sentence—a fifth of what he could have gotten—for his role in the WorldCom scandal.
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His wife, who is diabetic, and his four-year-old daughter are still living in the same small ranch-style house in a modest neighborhood of Boca Raton, Florida, where they’ve lived since 1990. Sullivan will likely serve his sentence in a minimum-security federal prison in Pensacola, Florida, 600 miles from his home. In July 2005, Sullivan agreed to forfeit the multimillion-dollar palace he built but never managed to move into, along with his 401 (k) retirement fund, to settle a class action lawsuit.
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The house sold in August 2005 for $9.7 million, less than half of its original price, while the 401 (k) is only worth $200,000 because most of it was tied up in now-worthless WorldCom stock.
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Robin Szeliga
—The former Qwest chief financial officer pleaded guilty on July 14, 2005, to one charge of insider trading, and faces up to 10 years in prison and a $1 million fine. Yet the illegal transaction netted her just $125,000—not a good trade. She has also reached a deal with the SEC, and she is widely expected to testify against Joe Nacchio.
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Sol Trujillo
—Even though Joe Nacchio edged him out after the Qwest-US West merger, Sol’s career didn’t grind to a halt. On July 1, 2005, he became the CEO of Telstra, Australia’s national phone company, after spending two years as CEO of Orange, the huge European wireless firm and subsidiary of France Telecom.
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Sanford I. “Sandy” Weill
—Weill’s reputation as the king of financial services took a hit after the Grubman scandal. At the end of 2003, he gave up his post as CEO of Citigroup, handing the day-to-day operations to Charles “Chuck” Prince.
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Nevertheless, Weill remains chairman of Citigroup until April 2006, although in July 2005 he briefly considered stepping down early—on the condition that he continue to have use of the corporate jet and other lifelong perks.
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Weill also remains heavily involved in charity work, perhaps securing a different kind of legacy by heading the Committee to Encourage Corporate Philanthropy and giving heavily to academic institutions and the arts. His name now graces Carnegie Hall’s Weill Recital Hall, the Weill Music Institute, the Weill Cornell Medical College, and the Weill Cornell Graduate School of Medical Sciences.
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Ed Whitacre
—Whitacre remains CEO of SBC Communications Inc.
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In a stunning and ironic twist of fate, the former Baby Bell agreed to buy Ma Bell itself, AT&T, in 2005.

Gary Winnick
—Despite founding Global Crossing and then selling more than $700 million in stock before it went belly-up, Winnick was never charged in the scandals surrounding the company and remains a multimillionaire, though his name hasn’t graced the list of
Forbes
’s 400 richest Americans since 2003. Although no criminal charges were filed by the government, Winnick did face many civil suits. He paid $55 million to settle a class action lawsuit filed by shareholders.
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Winnick continues to operate his investment firm, Pacific Capital Group, and he still maintains his 64-room mansion overlooking the Bel-Air Country Club, with renovations finally finished. Thanks to some big checks, his name can be found on the children’s wing at the Los Angeles Zoo, a section of the L.A. Central Library, and a cafeteria at Long Island University, his alma mater.
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