News Release

Salomon Smith Barney Fined $5 Million for Issuing Misleading Research Reports on Winstar; Charges Filed Against Jack Grubman and Christine Gochuico

Washington, D.C. — NASD today fined Salomon Smith Barney $5 million for issuing materially misleading research reports in 2001 on Winstar Communications, Inc. Separately, NASD announced that it filed a complaint against Jack Grubman, formerly the Managing Director of the firm's Equity Research Department, and Christine Gochuico, a Salomon Vice President and an assistant to Grubman, concerning the same conduct. Grubman and Gochuico authored the reports that were the focus of the inquiry.

Today's settlement between NASD and Salomon resolves a singular NASD investigation into Salomon's Winstar reports and does not address other, larger Salomon-related research analyst investigations currently underway by NASD and other regulators.

"What occurred in this case was a serious breach of trust between Salomon and its investors," said Mary L. Schapiro, NASD's President of Regulatory Policy and Oversight. "It should go without saying that reports issued for investors' use must be truthful. This case, along with others already filed and those under active investigation, make it clear that strong enforcement action will be taken against brokerage firms and their analysts who issue misleading research"

Today's settlement against Salomon Smith Barney is NASD's third largest in history.

Winstar was a broadband telecommunications service provider that filed for bankruptcy last year. Salomon's research reports strongly recommended Winstar as a "Buy" - Salomon's top rating - with a 12- to 18-month target price of $50 even as the stock plummeted from approximately $20 on Jan. 25, 2001, to 14 cents on April 17 of that year. In the settlement today, Salomon agreed to findings that it did not have a reasonable basis for that target price.

Salomon had a significant investment banking relationship with Winstar. Beginning in Feb. 1999 through July 2001, Salomon helped Winstar raise more than $5.6 billion, receiving fees of approximately $24 million for those services. Even as Winstar's prospects were falling and its stock price collapsing, Salomon worked with Winstar to address its funding needs, a relationship that continued even after the company filed for bankruptcy.

Grubman and his assistant worked closely with Winstar's management. They consulted Winstar's management prior to issuing research reports and financial models that purportedly reflected their independent judgment and analysis. For example, they sent Winstar officials the financial model they had created to analyze Winstar, and that yielded the target price, for approval before making it publicly available.

NASD found that Salomon's reports failed adequately to disclose the risks of investing in Winstar, including important risks relating to funding and bankruptcy. The reports contained repeated strong praise for Winstar, while belittling other analysts who were critical of the company. Some of the rebuttals were false and misleading.

The complaint against Grubman and Gochuico charges that e-mails and other internal Salomon documents demonstrate that, while they were publicly recommending Winstar to investors, they expressed contrary views in private. In various private communications, both Grubman and Gochuico highlighted risks of investing in Winstar and expressed doubts about Winstar's ability to obtain funds. Those risks and doubts were never disclosed to the investing public.

Some of the private communications included:

  • Salomon's target price of "$50 per share is shall we say -- extremely aggressive";

  • An unwillingness to change the firm's target price because of "optics"; and

  • Privately telling others to sell at prices far below the $50 target price

During this same period, Winstar, which traded on NASDAQ, had suffered significant losses, needed large amounts of capital to operate and was heavily dependent on external sources for financing. In 2000, it had a net loss of almost $900 million. In April 2001, it filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

Grubman and Gochuico initiated research coverage of Winstar with a Buy rating in January 1998. At that time, Winstar's market capitalization was almost $1 billion. They maintained a target price of $50 per share from October 2000, when Winstar's market capitalization was approximately $2.8 billion, until April 2001. By April 18, Winstar's market capitalization had fallen by more than 99 percent to approximately $13 million. Grubman acknowledged in an internal e-mail in May 2001, "If anything the record shows we support our banking clients too well and too long."

In settling this matter, Salomon neither admitted nor denied NASD's findings.

Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD's Web site at

NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information please visit