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WCOM: The Symbol of What Went Wrong

How one company came to symbolize the hidden ties that allowed Wall Street insiders to profit before the telecom bubble burst.

Chronology: The WorldCom-Wall Street Connection
The meteoric rise and fall of WorldCom has been intimately linked to Wall Street investment firms -- in particular Salomon Smith Barney and its parent company Citigroup. This chronology follows the hidden ties that enabled Wall Street insiders to shape and profit from the company's rapid growth, while leaving ordinary investors holding worthless stock when the bubble burst.
The Players
Here are profiles of the three principal players in the WorldCom-Citigroup story -- Jack Grubman, Bernie Ebbers, and Sandy Weill -- whose interconnected relationships have come to symbolize the conflicts of interest that pervaded Wall Street in the 1990s.
Interview: Eliot Spitzer
New York State Attorney General Eliot Spitzer spearheaded the investigations into Wall Street practices that led to the historic $1.4 billion "global settlement" between regulators and 10 Wall Street firms. Spitzer tells FRONTLINE that his investigation led him to the conclusion that Wall Street's whole business model in the late-1990s, in which stock analysts were fully integrated into the investment banking operations of brokerage houses, was not only "fundamentally corrupt" but, in fact, fraudulent. The only solution, he believes, is for Wall Street to implement the "structural reforms" agreed upon in the settlement, in which analysis and investment banking are walled off. And if abuses continue, he says, "The next time there will be absolutely no inhibition to bringing criminal cases" against individuals and the institutions.
Interview: David Chacon
David Chacon was a stockbroker at Salomon Smith Barney from 1996-2000. According to Salomon, Chacon was fired for allegedly stealing commissions from other brokers, but he denies the allegations and says he was forced out after blowing the whistle on allegedly criminal IPO allocations at Salomon's exclusive boutique brokerage in Los Angeles. Chacon alleges that Salomon tried to win over banking business from the heads of many telecom firms by giving them large IPO allocations for their personal accounts, and that this strategy was guided by the Salomon's top telecom analyst, Jack Grubman. He tells FRONTLINE that in one particular IPO allocation, WorldCom CEO Bernie Ebbers received a "kickback" worth $16 million. Many of the charges in this interview are contained in a lawsuit he has filed against Salomon in Los Angeles Circuit Court. Salomon Smith Barney has contested the suit and has issued an across-the-board denial of Chacon's charges. The firm also has sought -- so far unsuccessfully -- to have the lawsuit dismissed. Chacon has also filed a wrongful termination suit against Salomon Smith Barney.
Crying Foul: Broken Rules or Business As Usual
FRONTLINE's January 2002 report "Dot Con," investigated the worst excesses of the Internet bubble -- including both improper IPO allocations and analyst conflicts of interest. This section of the Web site contains a breakdown of how the "hot" IPO market of the late 1990s gave rise to unethical and even illegal practices by major brokerage firms, and legal expert John Coffee's analysis of prospects for reform.
Related Documents

[ Grubman May Be Out of Line ]
In May 2000, former Salomon Smith Barney broker David Chacon sent the following memo to a Salomon Smith Barney vice president to protest what he viewed as improper IPO allocations to corporate banking clients, including Bernie Ebbers, in an effort to gain further business. Chacon writes that he is troubled by Jack Grubman's "well known conflicts and resulting misguidance to our retail clients."

[ AT&T and the 92nd Street Y ]
Salomon Smith Barney telecom analyst Jack Grubman sent this memo to Citigroup CEO Sandy Weill in November 1999, shortly before he upgraded his recommendation on AT&T's stock from "neutral" to "buy." In it, he reports back on a "good" meeting with AT&T CEO Michael Armstrong. He then switches gears and asks for Weill's help in gaining admission for his children into the exclusive 92nd Street Y Preschool.

[ Jack Grubman: In His Own Words ]
Although he declined to speak to FRONTLINE, Jack Grubman appeared before the House Committee on Financial Services on July 8, 2002 -- before many of the specific allegations in New York State Attorney General Eliot Spitzer's investigation were made public -- to answer questions about the collapse of WorldCom. Here are excerpts from his written statement and oral testimony, in which he discusses his "telecom thesis," his relationship with the boards of companies whose stock he covered, his attendance at WorldCom board meetings and allegations of his involvement in preferential IPO allocations to WorldCom execs.

 

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published may 8, 2003

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