By DAVID MOON, Moon Capital
November 24, 2002
Wall Street's dirty little secret just took a juvenile turn. Actually,
the turn is more childish than juvenile.
For years, Wall Street has known what most of Main Street is only now
learning: stock recommendations from brokerage firms are often (exclusively?)
influenced by those firms' ability to secure lucrative investment banking
relationships. Stock research is not about trying make money for
clients. It is about trying to make money for the broker. In effect,
Wall Street firms use their published research recommendations as a way to gain
favor with the firms on which they purport to issue unbiased research.
At least that is what I thought until this week. If that were only the
We now have learned that Wall Street recommendations are influenced by a
number of things, including trying to get your children into 'the right' nursery
school. Apparently, that may have been former Salomon Smith Barney star
analyst Jack Grubman's motivation for some of his investment recommendations.
Jack Grubman is the poster boy for Wall Street analysts. Two years ago,
a positive recommendation from him could send a stock soaring. Executives
and directors of the companies he covered eagerly sought out his advice ' even
while he supposedly produced unbiased research on those companies.
First Grubman claimed he upgraded his rating on AT&T stock in late 1999
because the fundamentals of the company warranted it. Most of Wall Street,
however assumed the changed was an effort to become the investment banker for
AT&T's spin-off of AT&T Wireless. Then Grubman admitted he changed
his AT&T recommendation to help his boss in some personal power struggle
with former Citigroup co-CEO, John Reed. (Salomon Smith Barney is a
subsidiary of Citigroup.) Grubman then he recanted his second explanation,
admitting he 'invented a story in an effort to inflate [his] professional
Emails have now surfaced in which Mr. Grubman says he changed his
recommendation on AT&T stock to try to get his twins admitted into 'an
exclusive nursery school in New York.'
I'm not even sure what 'an exclusive nursery school' is. My twins (only
slightly younger than Mr. Grubman's, but apparently more academically deprived)
attend an 'Early Enrichment Program.' I thought that sounded pretty
exclusive. But I didn't have to change my opinion on any stocks to get my
kids into the St. Mark's Early Enrichment Program. We just had to put them
on a waiting list before they were conceived.
It is a little tougher to get into the 92nd Street Y nursery school.
The Material Girl, Madonna, couldn't get her child admitted. But she
didn't have Jack Grubman helping her. The Wall Street Journal reports that
recently discovered Grubman emails claim that the change in his AT&T
recommendation was the impetus for a $1 million donation to the nursery school
by Citigroup. That donation helped Mr. Grubman's budding young capitalists
get into the 92nd Street 'diaper Dartmouth.' (AT&T Chairman Michael
Armstrong sits on the Citigroup board.) Grubman denies the connection.
I'm dizzy trying to keep up with Grubman's latest explanation. He says
one thing. The Wall Street Journal reports another. Former Grubman
colleagues offer different explanations.
I am sure of only one thing: Jack Grubman's investment recommendation on
AT&T had nothing to do with the value of AT&T.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).