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July 08, 2002 | |||||||||
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WorldCom and Citigroup: Highlights from the Testimony of SSB's Jack Grubman
“WorldCom is a company that I have believed in wholeheartedly for many years. I am sorry to see investors suffer losses. I am sorry to see employees laid off. And I am distressed by the apparent fraud that the company announced 13 days ago. In hindsight, I regret that I was wrong in rating WorldCom highly for too long. I surely would have downgraded the company much earlier had I known the truth about its financial performance.” “I had no advance knowledge of WorldCom’s $3.8 billion accounting fraud. Any speculation [to the contrary] is categorically false.” “Neither I nor any other analyst has the ability to conduct independent audits of the companies we follow. Analysts are not auditors. We rely -- and are supposed to rely -- on the assurances of those whose job it is to prepare and certify a company’s financial statements. Our judgments are only as good as the public information on which they are based. “ “For the past 17 years, I have held a consistent thesis that the newer, more nimble and entrepreneurial telecom companies such as WorldCom would successfully compete with and even outperform the entrenched industry giants. From the late 1990's, until a few months ago, I believed that WorldCom was the company best positioned in terms of assets, earnings and business model to outperform the industry over the long term.” “Beginning in March of this year, my published views on WorldCom became increasingly negative, as WorldCom disclosed the existence of an SEC accounting inquiry, reduced its earnings estimates, changed CEOs, suffered multiple rating agency downgrades, and drew closer to a restructuring that would likely have diluted the equity of existing shareholders.” “My gradual downgrades of WorldCom between March and June were consistent with the actions of many other Wall Street analysts from firms such as Goldman Sachs, Lehman Brothers, Bear Stearns, Merrill Lynch and JP Morgan, and Sanford Bernstein – a pure research house that does no investment banking.” “But for WorldCom’s fraud, I would have seen a more dire picture much earlier. My positive view of WorldCom depended on the continuation of WorldCom's high profit margins. If I had seen how badly and quickly those margins eroded, it would have shaken my overall view of WorldCom's long-term prospects and I would undoubtedly have downgraded WorldCom much earlier than April 2002.” “I make a point of trying to develop good working relationships with management. As I see it, part of my job is to know how an industry is developing and to engage in a serious, active dialogue with the people who make the decisions in order to put SEC filings and audited financials into context and to assess management’s capability to execute its plans. That, in my experience, is what most investors want and expect from analysts. There’s no question that you have to manage these relationships carefully, and it is critical not to let your own judgment get clouded. But if you strike the right balance, your opinions will be more informed.” “Research analysts at Salomon Smith Barney are taught from the day they start that the integrity of their research product is their lifeblood. We are taught that the analyst’s most valuable asset is his reputation with investors. We are taught that any analyst who squanders that reputation with investors to curry favor with any interested party is pursuing a fool’s errand. “ “I certainly have made mistakes. In retrospect, I regret staying with my point of view for too long. For most of the last decade, I was right and I was roundly praised, and now I’ve been wrong and am being roundly criticized. That is the nature of this business. Through it all, I have always written what I believed. I have always called the shots as I have seen them.” | ||||||||||