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Equity research has been a big moneymaker this year — for regulators, not investment banks. The latest regulatory cash cow is Citigroup Inc., which agreed Monday to pay a $5 million settlement for misleading research published by Salomon Smith Barney’s former top telecom analyst, Jack Grubman. The settlement concerns only research that Grubman published about Winstar Communications Inc. in 2001. The National Association of Securities Dealers (NASD) also filed a complaint against Grubman and a colleague, Christine Gochuico, who co-authored the report. The $5 million may not sound like much — it is a fraction of Grubman’s $33 million severance package, for instance — but it is the third-largest settlement in NASD history, the regulator said. In response, Citigroup’s new chairman of investment banking, Charles Prince, immediately sent an internal memo to employees stating that the firm is pleased with the settlement. Prince noted that the firm neither admitted nor denied the allegations, which is in keeping with traditional practice in regulatory settlements. Prince also indicated more research overhauls are in store for Salomon Smith Barney. “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,” Prince said in the memo. But, he noted, “Given the ongoing litigation surrounding these issues, we are not at liberty to discuss the details of this matter.” The NASD said that Grubman rated Winstar a “Buy” even as it was evident that the company was bankruptcy-bound. Grubman kept a $50 price target on Winstar as the price plummeted from $20 to 14 cents within three months in early 2001. At the same time, the NASD said, Salomon helped Winstar raise $5.6 billion and received advisory fees of $24 million, all between February 1999 and July 2001. The NASD also said that Grubman worked closely with Winstar management, consulting on financial models and research reports about the company. Copyright (c)2002 TDD, LLC. All rights reserved.

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