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Investors who lost money on AT&T stock have alleged enough of a connection between their losses and conflicts of interest at Salomon Smith Barney to survive a motion to dismiss, a federal judge has ruled. Southern District of New York Judge Gerard Lynch said Thursday the case against Citigroup Inc. and former star telecommunications industry analyst Jack Grubman could proceed because aggrieved investors had pleaded “loss causation” by charging Grubman, long known as a skeptic on AT&T, was compromised by conflicts when he boosted his rating on the stock in 1999. Judge Lynch, in In Re Salomon Analyst AT&T Litigation, 02 Civ. 6801, dismissed claims that another analyst at Salomon, who was not named in the complaint, pulled his punches in analyzing the prospects for an AT&T spinoff, AT&T Wireless. The claims on AT&T alleged a web of favors delivered to bring greater profits to Salomon, which has since been renamed Citigroup Capital Markets, and help Grubman and former Citigroup Chairman Sanford Weill in other ways. In 1999, Weill was allegedly told by AT&T Chairman (and Citigroup board member) Michael Armstrong that Grubman’s negative ratings of AT&T were hurting Salomon’s bid for AT&T’s investment banking business. Weill allegedly urged Grubman to take a “fresh look” at AT&T, and Grubman did that and changed his rating on the stock. Grubman, in turn, allegedly used the change on AT&T to win a favor from Weill — help in getting his twins into the preschool at the 92nd Street YMHA — a move that was followed by a $1 million donation to the school from the Citigroup Foundation in 2000. Armstrong, it is charged, helped out Weill by backing his bid to become sole chairman at Citigroup and oust competitor John Reed. In the end, Salomon was selected by AT&T to handle the AT&T Wireless stock offering and garnered $63 million in investment banking fees on the deal. In moving to dismiss, the defendants argued that the claims regarding AT&T were flawed because the investors had alleged only “artificial price inflation,” which is insufficient for a showing of loss causation under the law of the 2nd U.S. Circuit Court of Appeals. Lynch said federal courts of appeals “are deeply divided over whether artificial price inflation alone may suffice to allege loss causation.” Some circuits hold that price inflation is enough, and others say more is required. The 2nd Circuit has held, he noted, “in the context of misrepresentation cases, mere price inflation, where the ultimate deflation is caused by other factors unrelated to the misrepresentation alleged, cannot satisfy the loss causation requirement.” However, Lynch said, the investors in the AT&T case “do not simply rest on allegations of artificial price inflation as the sole explanation for their claimed losses; in contrast to defendants’ characterization, plaintiffs do set out a causal chain linking their losses to the alleged fraud.” On the claims based on the research reports for AT&T Wireless, he said, referring to Salomon Smith Barney, “Plaintiffs have painted a disturbing picture of the atmosphere at SSB with allegations that, if true, make out a strong case that conflicts of interest there may have provided a motive for analysts to issue research reports that were more positive than their truly held opinions would dictate.” But he said no facts were alleged in the complaint showing that the analyst who covered AT&T Wireless for Salomon “took the bait” and changed his rating for the stock based on a conflict of interest or pressure from the investment banking section of the firm. The plaintiffs he said, failed to “say what specifically was false” about the analyst’s reports. In contrast, “The far more detailed allegations about Grubman and his AT&T research reports are designed to support a claim that Grubman, after initially reporting his true negative view of AT&T for years, deliberately falsified his opinion in advance of the early 2000 AWE stock offering, for the specific purpose of furthering a scheme that would bring a particularly lucrative investment banking transaction to Citigroup and certain personal benefits to him and to Weill,” Lynch said. AWE is AT&T Wireless. “Under this narrative, Grubman reverted to his true opinion beginning in May 2000, as soon as his goals were accomplished.” Marc I Gross, John Balestriere of Pomerantz Haudek Block Grossman & Gross are lead counsel for plaintiffs. Martin London, Richard A. Rosen, Brad S. Karp, Eric S. Goldstein and Joyce S. Huang of Paul, Weiss, Rifkind, Wharton & Garrison, and Peter K. Vigeland of Wilmer, Cutler, Pickering, Hale and Dorr represented the defendants.

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