And the point of the Chinese wall is to do what?
The point of the Chinese wall is to prevent bad things from happening, essentially. ... It's there to prevent insider trading -- a stockbroker, being aware of an imminent transaction and investing his own money, or his clients' money, into a transaction before the public is aware of it.
So at Salomon Smith Barney, this Chinese wall was broken down. This telecom mafia united and brought together the analyst side, the brokerage side, the equity side, the debt side, the investment bankers. What was the advantage to doing that? Why did Salomon Smith Barney want this vertically integrated telecom mafia operating that way?
The reason why the group was structured that way and the reason why it [w]ields so much power is that a lot of things can be done that can't be done at your competitors. A good example of that would be the knowledge and the awareness of exactly how well the corporate officers' personal accounts are doing, in terms of performance.
Now, you've said at one point this group was headed by Jack Grubman, the analyst. It's interesting. How does an analyst wind up kind of heading a group of investment bankers?
I think that the reality is that the investment bankers, to a large degree, are quantitatively oriented. They look [at] and value corporations. But in terms of understanding the broader context of the inner workings of the telecommunications sector, the direction of that specific sector on a going-forward basis -- that's the analyst who has that information.
How much of this was Grubman personally? Grubman had become a really substantial figure. Was this Grubman's charisma? Was this Grubman's knowledge? Was this Grubman's drive? Was this Grubman's power? What was it?
I think it was Grubman's arrogance -- his arrogance that he didn't have to play by the rules any longer, that he had so much clout and so much power, that he didn't have to follow traditional barriers.
But where'd he get the power? Personal connections, or what?
I think the basis behind Grubman's success was founded at PaineWebber, whereby he met one of his biggest clients -- probably the largest client on Wall Street during that period of time -- Bernie Ebbers and WorldCom. ...
He got his influence in the market from his early success with WorldCom. That was really the basis behind many industry watchers taking notice of Jack Grubman, and his advice and direction he was giving to WorldCom.
Well, was he just smart about WorldCom, or was he buddy-buddy with Bernie Ebbers? It's a little hard to understand this. I mean, it looks from the outside as though he came as close to forming a partnership with Bernie Ebbers as you could do without joining the firm.
Absolutely. ... You really do have to step back to his relationship which was founded with Bernie Ebbers. Jack Grubman was an unknown analyst. ... It wasn't until he met Bernie Ebbers -- who also had very little background and experience in running a telecommunications concern -- getting together at the exact perfect moment in time. That perfect time was 1994, 1996 -- right in that period of time where a lot of deregulation was occurring within the telecommunications sector. A lot of new things could be done, and those new things were adopted by Jack Grubman and Bernie Ebbers.
So what you're saying essentially is that Grubman rode Ebbers' tail, and Ebbers [rode] Grubman's tail?
Absolutely right. They were indebted to one another.
Sounds like a symbiotic relationship.
Absolutely. At the same time, you had the dramatic rise in the transport of data via the Internet. So all the planets lined up in the right way. This early relationship of two individuals ... getting together and creating something at the perfect moment in time.
So they were allies?
They were allies, and they were such allies, that it was well known that they were best of friends.
So Grubman goes down to Congress, and they ask him, "Are you a close friend of Bernie Ebbers?" and he says, "Well, I know Bernie, and I've met him several times." He sort of treats it as though it's not a friendship, it's strictly professional. What's your response to Grubman's own characterization of his relationship with Bernie Ebbers?
... What business would he have being at Bernie Ebbers' wedding, if he didn't have a close personal relationship with Bernie Ebbers?
So they were in tight?
They were in very tight. ...
Now Grubman says -- he testified in Congress, and he's said it in any number of papers and so forth -- that he didn't do anything wrong. He may have been a lousy analyst, it turns out, because he recommended a whole lot of companies that went bust, but he believed in them honestly. He goes back, and he says, "It was my thesis that, in this new deregulated world, these upstart companies were really going to do well against the old established Bell companies and AT&T. That was my view of the world."
Now, my question is, from what you know inside Salomon Smith Barney, was Jack Grubman's theory just a theory about how telecommunications would develop? Or was it a business plan to generate revenue for Salomon Smith Barney?
I think it, first and foremost, was a business plan to generate a huge payoff for not only himself, but the firm. Secondarily, as things fell into place, I think he began to actually believe that his business plan actually -- in terms of bringing in business for himself and the firm -- corresponded to what was actually beginning to occur on the telecommunications sector.
So I think, initially, he believed that he was smarter than everybody else. He got in front of the wave before everybody else, and that he was right in many of his assumptions.
But now, when he says on Capitol Hill to various people, "Look, this was just what I truly believed in," what's your response to him? ... How do you respond to Jack Grubman, when he says, "This was just my analysis. All I was doing was analyzing?"
... I believe that he thought that he could pull the wool over some very important people and some very smart people's heads. ...
How do you know that?
Well, at one point, one day and one example that I found most troubling was that we had two offices in downtown L.A. One of the offices apparently handled some of the other officers and directors of Global Crossing. Apparently, one of those officers and directors found his way to the Los Angeles office that I worked in. Because I worked with Rick Olson, and Rick Olson was known to represent many corporate officers in telecommunications concerns, I took the call.
I took a call from an individual who described himself as a corporate officer of Global Crossing. That officer mentioned that he wished to sell and liquidate many of his shares. My response was [that] this would be against Jack Grubman's current stock recommendation of a strong buy in a much higher price target than where the stock was then trading.
And the Global Crossing guy said to you in response?
"Look. We all realize this stock is overvalued here. You don't think we talk to Jack on a weekly basis?"
In other words, they had their own pipeline to Jack Grubman, and he was giving them a different word?
Yes, and not only that, but he was also mocking me. He mocked me, mocked my own retail clients, who were being told completely disparate advice.
This is a memo that you wrote internally to higher-ups. Tell me what you wrote back in May 2000 to your higher-ups at Salomon and Citigroup. ... What were you saying to them?
I was putting my superiors on notice that I would no longer look past these well-known conflicts of interest. It was well known within the firm, and to many senior officers -- in fact, the local and regional directors would almost laugh about this disparate advice that was occurring via Jack Grubman. ...
So how was he conflicted? He was saying one thing to one bunch, and another thing to another bunch?
Absolutely. He was saying one thing to unsophisticated retail investors and pumping the stock up higher. That would allow two things to occur: One, his friends, people who he was in indebted to and people who were indebted to him, to do a favor. That favor would be getting corporate officers and friends that he had in the space out of the stock before unsophisticated retail investors.
The second thing that it would allow Jack Grubman to do is to artificially inflate the stock prices, so he could then advise these same corporations, whom he directed many of the decisions, to advise them to acquire companies that he couldn't otherwise acquire, had the stock been at a lower valuation. ...
For example, if WorldCom and Bernie Ebbers had managed, through Jack's recommendations, to get their stock valuation much higher, then they would be able to do things the corporation wouldn't otherwise do -- that was to be able to acquire their competitors. So if you can manage to get that stock price higher, you can use that stock as currency to acquire your competition.
Then the investment bank gets income through a new M&A -- merger and acquisition deal.
It's payday. In fact, a mergers and acquisitions transaction, or an advisory fee, is well known within Wall Street to be the most lucrative and profitable business that an investment bank gets. ...
Who used the term "telecom mafia?" Was that the general public? Was that in the press, or was that inside Salomon Smith Barney talk?
The term "telecom mafia" would be used behind closed doors only. It was something the group threw around from time to time. In my mind, and being in several meetings where that term was used, it brought up a lot of additional concerns for myself.
But were people proud of it? Was that kind of, "We're the telecom mafia?" Was that kind of a jaunty thing inside Salomon Smith Barney? "This is our team?"
I don't think it was so much a team-building approach. It was almost a communication of strength. It wasn't said in a sort of jokingly manner. It was said in a very serious tone, and it was said in terms of getting across a message to someone on the other side of the table, an innuendo. That innuendo was, "We control a huge sector of the economy here. If you want to do business in this sector, you're going to do business by our rules."
So it's a matter of conveying power?
Power, or control -- and the ability to influence very, very powerful people. ... There's no question that that term was used very sparingly. But when we're discussing how secret and how covert this operation was, I think the clearest example of that would be the fact that Salomon even went so far to create a secret branch in the L.A. office that was within the physical confines of the standard office.
What branch was that branch, and who ran it? Tell me about that branch.
The branch typically would be composed of 30 to 50 stockbrokers. This branch was composed predominantly of one or two individuals. That individual, first, was Rick Olson and, secondarily, it was me, getting involved at a later date.
OK. So they set up a secret branch run by Rick Olson, using you as his deputy. What were you doing, and what was your connection with the telecom mafia? ... How do you handle the brokerage accounts of the top executives?
Initially, this secret branch was created and designed and implemented for a very specific reason. That reason was that one individual was doing so much business -- in fact, probably the equivalent of an entire branch of 30 to 50 brokers -- by handling the corporate officers of Jack's corporations, predominantly based in the telecommunications sector -- the CEO and CFO of corporations like Qwest Communications, WorldCom, Metromedia Fiber, Level 3, McLeod and so on and so forth. ...
So all those CEOs and CFOs -- what's happening to them? Who's taking care of them?
Rick Olson was the point man for Jack Grubman. He was in charge of managing the personal stock portfolios of the corporate decision makers whom the firm did investment banking business with, strictly in the telecommunications sector.
Rick Olson is Jack Grubman's broker?
He's the guy who's handling the stuff? He's the guy who's handling with kid gloves the guys that Grubman is courting?
Absolutely. Again, the reason is ... these rules that were carefully designed and structured to protect individual investors are broken down in such a way that Jack Grubman would be very much involved in the management of these portfolios and ensuring that his top decision makers, within a corporation, who directed investment banking to the firm, were being taken care of.
OK. What does "being taken care of" mean? Sweetheart deals? IPOs? When you say that, what does that mean?
What "taken care of" means is that it is unacceptable for these clients to lose stock value in their stock portfolios. One of the mechanisms which the firm had at its disposal, and was a great mechanism to build immense wealth, was the allocation of hot-issue IPOs, or initial public offerings.
How'd they do that? Rick Olson handled that? You handled that? How'd that work?
Rick was the one broker responsible for all these corporate decision makers. This allocation to Rick Olson was separate and distinct from our firm's standard allocation policy.
So when you're working with him, do you and he talk about these allocations? Do you handle these allocations? I mean, there are a whole bunch of them that come along.
Yes. For that period of time, there were many, many corporations that were going public at the time. As you may recall, oftentimes these corporations would return a 30 percent, 50 percent, 100 percent, 300 percent return in a very short period of time.
Fast turnaround. But, now, what was Rick Olson's relationship with Grubman? Is Grubman calling Olson and saying, "Take care of my buddies?" Is Grubman getting allocations sent to Rick Olson? Who's allocating the IPOs here? Is it Grubman?
Yes. I mean, you'll hear in the press, and they'll say, "Well, Jack Grubman's not responsible for allocating IPOs." That's true on the surface. The reality is he had the power and the ability to step into the process at any point in time.
So it's true that the allocation of IPOs was handled by what we call the syndicate desk, who'd be responsible for allocating large chunks of an unwritten corporation to various branches throughout the country. [But] Rick Olson had a separate allocation that was directed in an underhanded manner -- to make sure that the firm's top clients were taken care of.
OK. So that's Rick Olson. What's Jack Grubman's role in this?
Jack Grubman's role is calling the syndicate desk and ensuring that his guys are being taken care of. Jack Grubman's involvement is communication with Rick Olson and ensuring that their accounts are doing well. Jack Grubman's involvement is sitting down with corporate officers on a daily basis and asking them the question, "Are you happy with the returns that you're getting at our firm?"
And he's not talking about corporate returns, he's talking about personal returns.
He's talking about personal returns.
So Grubman, again, gets called to Congress, and they say -- Kanjorski of Pennsylvania, somebody else, asked him, "Did you have anything to do with the allocation of IPOs?" and Grubman says, "I can't remember. I'm not saying yes, and I'm not saying no." ...
This group that was designed and led by Jack Grubman was an integrated team of individuals on all sides of the firm -- coordinating, discussing, communicating and sharing information in order to harness immense power. Much of that power, in terms of generating new business, is via the allocation of large sums of hot-issue IPO stock to the decision makers within these respective corporations. ...
Editor's note: Read excerpts of Grubman's testimony to Congress about his involvement in preferential IPO allocations.
Why did telecom become so important to Salomon Smith Barney? You said a moment ago, if I understood you correctly, that you thought that, in this period of the late 1990s, that telecom generated roughly half the investment banking fees of the entire firm. How did one sector become so important?
I think you had some smart people sitting back and taking a look at the broader economy, and attempting to say, "Look, where can we focus our time and energy and concentrate a lot of resources and dominate the biggest portion of a specific sector?"
The biggest portion of the U.S. economy is telecommunications. I mean, that's all the communications we have via phone. It's all the communications we have with information transferring and being sent and received all over the globe. So if you take a step back, that is the largest component of our economy. It's also the only sector which, since the beginning of time, has grown -- year in, year out, every year -- and, specifically to that time period, was growing by leaps and bounds, due to the advent of the Internet. ...
But it's also a sector that's controlled by very few individuals. If you think about it, you could almost count the top 90 percent of the entire sector being run by probably 10 or so corporations, as opposed to, say, many other sectors where you've got hundreds, or even thousands of companies that you're attempting to get your arms around.
So the point is: If you can dominate the relationships within a sector that's tremendous in size and scope and has very few individuals whom you need to use as a pawn to accomplish your objective, well, then, you have a winning business plan. ...
So what happened if you were in the telecom industry, and you didn't play ball with the telecom mafia at Salomon?
If you were a corporation, say, selling communications equipment, and you weren't prepared to give up a lot in terms of control in terms of granting IPO shares to the telecom mafia, that you literally couldn't do business within the space. You were out of business, if you're looking to sell to these corporations who could make quick purchase decisions, and you were looking to sell communications equipment.
If you were a telecommunications, say, service provider and when Jack Grubman would walk in the office and you weren't literally on your knees, willing to grant Salomon the power to make decisions for them -- essentially management decisions, acquisition decisions, going into board meetings and driving discussion, driving strategy, driving decisions -- then, if you were--
Is that what Grubman was doing in those meetings?
Absolutely. Driving decisions, driving strategy, helping others reach the same conclusion that he wanted, and that is, "You need to buy this company right now. And if you don't, guess what? Then Qwest will. If Qwest doesn't buy it, then I'll get Bernie to buy it. And if Bernie doesn't buy it, I'll get Winnick to buy it." So it's very simple.
Do you hear that talk? How do you know that's what he's saying in those meetings?
That's just, again, my closeness with the individuals involved, my discussions with investment bankers, and just my general knowledge at the time on how these things worked. ...
How did people handle a guy like Grubman, if he's swinging all this weight within the firm?
I think the reality is that the weight you swing in this business -- and there's other terms for that -- is based on how much you're bringing into the firm. The reality was, he was by far and away bringing in more business than any other person in the firm.
So by its logical extension everybody, for the most part, was on their knees, because you couldn't cross him. You can't cross someone like that. I don't care if you're theoretically his boss; the reality is if he walks out the door, your firm collapses, to a large degree. A big portion of your profits and revenues walk out the door with one individual.
That's an enormous amount of power to be able to yield, and that's the attraction to Wall Street, right? It's what people are attracted to. ...
By this point, you're living in a pretty heady world, right? You guys come into this firm in 1996, and by 1998, 1999, you're dealing with the accounts of some of the richest people in America. So what are you thinking? Where are you headed in your career? Is this what you wanted to get into, and why?
Well, I think that's been asked often. I did very well. I was told that at some point that I'd been promoted to senior vice president in the shortest period of time in the firm's history. So not to pat myself on the back, but without question, everybody all the way to the top recognized that, and sought to put me in the right position.
At that moment in time, I [was a] senior vice president with Rick Olson, as his sort of right-hand man, as someone who understood how it really worked, who could be trusted, because he was a young person who was receiving tremendous compensation, and who had some ideas and--
So what are you making at this point? How much money are you making?
Maybe three quarters of a million -- something like half million, three quarters of a million. My third year going into it, I think I was annualized at about three quarters. Something like that.
And you're how old -- 28?
Twenty-seven, 28. Right in there.
That's a lot of money. I mean, you must've felt you'd hit it.
Well, to be honest with you, you get yourself in a position where you're meeting on a daily basis and talking with people who are worth $100 million, a quarter billion, $5 billion, $16 billion at the top. ...You have a Who's Who in the business world and the Forbes 50 being thrown around as clients of our secret branch there.
You begin to lose sight of what a million dollars is really worth, if you will. I mean, at one point, our clients collectively controlled, according to Olson, over a $100 billion in assets. They were all individuals, and it was a very short list.
Thirty to 50, maybe. ... You probably had eight to 10 billionaires as clients under one roof and in one office, managed predominantly by one individual. ...
Let's go back and talk about the IPOs. Why were the allocating of the IPOs so important to the investment banking business? What kind of tool were they?
When you were a child and your mother told you, "There's no such thing as free money," what your mother told you was a lie. OK? Because what these IPOs represent is they represent free money.
It was known during that period of time many of these companies would have imminent rise. If you had the ability to acquire them at the IPO price, that there's no question you would not lose any money. There's a multiple of interest in terms of buying those shares. So supply and demand dictated that the shares would rise by 30 percent, 40 percent, 50 percent, 100 percent the first day. So that in itself is free money. But Salomon took it to another level.
The way they took it to another level is: Oftentimes, they did not allocate the shares until after the stock had been trading. So rather than, say Goldman Sachs saying, "Bernie, we've got 10,000 shares of XYZ company at the IPO price," the day before the stock starts trading, Salomon would be able to take it a few notches and be able to call these same officers and directors, saying, "Look, I have 20,000 shares of this company. It's trading at $85 right now, and wanted to give you the opportunity to invest at the IPO price."
Which is much lower.
Fifteen dollars, 20 dollars. You're talking about two or three times your investment, and you haven't even made the decision to buy yet. So it allowed Salomon Smith Barney to buy people, to buy their decisions, to buy their influence, and to buy their business.
By handing them free money?
By handing them free money. ... In fact, it's not an investment at all, now is it? Because an investment, in economic terms, by its very nature, would imply risk, and that's a risk-free transaction. That cannot be construed as anything other than a financial bribe -- a cash payment concealed as a true investment. ...
Just talk to me for a moment about the Rhythms NetConnections IPO and what Salomon did for Bernie Ebbers of WorldCom.
Several days after the stock was trading, I sat right next to Rick. I walked by, and he questioned me, and his question was, "David, how many shares of Rhythms did you get?" because it was seen as a very high flyer that prior week. I said, "Well, just a few thousand shares or so. Why?"
He said, "Well, between us girls" -- and what that meant was that's kind of telecom mafia lingo, for "This doesn't leave the room" -- "Bernie Ebbers just got 350,000 shares."
My response was, "That's a big deal," meaning, that's a lot of stock. That's a lot of wealth that was just turned over to one individual. And his response, "Well, a big deal, indeed."
The innuendo that I got was there was a behind-the-scenes transaction that was an imminent banking deal that would generate huge fees. So when I pieced the two together, my sense was, at the time, "There must be a big, impending M&A transaction regarding WorldCom."
A few months later, when the largest acquisition in U.S. history was announced between WorldCom and Sprint, a light bulb went off, and the piece of the puzzle sort of fell together for me.
Meaning Salomon was getting the biggest business around?
Yes, meaning, at the time, Salomon Smith Barney influenced Bernie Ebbers' decision to hire Salomon Smith Barney as M&A, mergers and acquisitions advisor to the biggest transaction to date, due to his payoff of in Rhythms shares.
Are you sure he said "350,000 shares?"
I'm sure he said "350,000 shares."
Sticks in your mind?
Sticks in my mind. It continues to ring in my head.
Editor's Note: Rick Olson declined to talk to FRONTLINE about these allegations.
Because? Is that an unusual figure? What would make that figure stick in your mind?
It's so exorbitant, that it would make Fidelity's entire allocation of Rhythms pale by comparison. So one individual was receiving a multiple of what an entire multi-billion-dollar institution would be receiving on an allocation like that. So to me, it was totally and completely absurd. It was a totally ridiculous number. ...
Did you do a quick calculation and figure out how much these 350,000 shares meant to Bernie Ebbers?
Yes. I did a quick calculation based on the information that I'd received from Rick Olson in terms of how many shares he received, when the stock was trading, to when I understood that Bernie sold shares. So it was a quick mathematical calculation that I'd done in my head.
... I figured out a financial payoff of $16 million.
How did you interpret that? What did you see that as? What was your reaction to that?
A kickback. A kickback. The way I saw that mentally in my head at that moment in time -- and something that was very disturbing -- was I saw a check being cut in the future, that would be cut to Salomon eventually, for mergers and acquisitions advice on the impending Sprint acquisition. Call it $35 million and some-odd dollars that would be paid by WorldCom shareholders.
That money, in theory, would be going to Salomon. Salomon would then essentially launder that same money that was WorldCom shareholders' dollars and pocketbook and be converted and replaced -- not into WorldCom's corporate checking account -- but into the personal account of Bernie Ebbers.
Via the IPO?
Via the IPO -- risk-free profits in exchange. You pay $35 million. No problem. "Sure, you're going to pay us a lot of money, Bernie. But guess what? We're going to convert that via IPO, risk-free profits, and we're going to replace that same money back in your personal checking book." What a deal. ...
Did anybody ever say to you at Salomon that the IPO allocation to Bernie Ebbers on Rhythms was to encourage him to do banking business?
No, I don't think -- see, it's odd that you frame it in that tone, because the way I look at it is, how do you pay a corporate officer $5 million, $10 million, $20 million in risk-free profits and not have it influence his decisions? It's an impossibility. Of course it's quid pro quo. There's no way that any sane individual can dispute that. How do you pay millions of dollars to an individual, and then ask them the question, "By the way, I'd like to do your banking business?" How do you not have that be the basis for that influence? ...
Salomon Smith Barney says that you took commissions that were due other brokers. What's your response?
That's false. The reason why it's false is because they're the ones that directed those commissions to me -- not me. ...
And what'd they do?
What they did is they either changed documents, or went through the back office and redirected other people's gross commissions and directed them to me improperly, to make it appear as though I was doing something wrong.
Then they challenged me on it, and said, "David, we have all this information here. What do you have to say?"
So they were trying to force you out? They were trying to force you to quit?
In the end, why did you leave?
They retaliated against me, and they fired me.
Did they give you a cause?
They said that I traded without authorization in [a client's] account.
What's your response to that?
That was false. Not only was it false, but I had [the client] and his wife -- basically, they wrote a letter to Salomon, saying that they were attempting to get them to say things that they never said. They also signed a legal declaration, saying that this never happened, and that Salomon made it all up.
Did Salomon Smith Barney ever report your supposed infractions to the NASD, to the regulators?
No, they didn't. ...