NEW YORK, Dec. 3, 2004 (PRIMEZONE) -- In an important victory for investors, Manhattan Federal Judge Gerard E. Lynch today issued an opinion allowing AT&T stock buyers to proceed with a class action lawsuit against Citigroup, Inc., Salomon Smith Barney -- Citigroup's investment banking division (now renamed "Citigroup Capital Markets") -- former Citigroup CEO Sanford Weill, and former Salomon Smith Barney research analyst Jack Grubman.
Marc I. Gross, Esq., of the New York City office of Pomerantz Haudek Block Grossman & Gross LLP is Lead Counsel for the Louisiana School Employees Retirement System and Private Asset Management, which are the Lead Plaintiffs in the case.
The lawsuit alleges that Grubman, Weill, Salomon Smith Barney, and Citigroup carried out a scheme to defraud buyers and sellers of AT&T stock by issuing false research analyst reports on AT&T. The motive for the scheme was for Salomon to reap lucrative investment banking business from AT&T, and for Grubman and Weill to boost their personal compensation and gain other benefits. (Claims based on Salomon's research coverage of AT&T Wireless were dismissed.)
As Judge Lynch's opinion explains, the lawsuit alleges that Grubman, Salomon's leading telecommunications analyst, had until late 1999 consistently given AT&T lukewarm ratings and analysis. On November 29, 1999, Grubman announced that he was upgrading AT&T from his "Neutral" rating to the highest possible "Buy" rating. The lawsuit charges that Grubman's AT&T rating upgrade was fraudulent and did not reflect Grubman's true assessment of the stock.
The lawsuit alleges that Weill persuaded Grubman to issue the fraudulent upgrade in part in order to win investment banking business for Salomon from AT&T. Following Grubman's upgrade, AT&T selected Salomon for an important banking assignment through which Salomon earned $63 million in fees.
According to the lawsuit, an additional motive behind Weill's efforts to convince Grubman to issue the fraudulent upgrade was Weill's desire to gain the support of then-AT&T CEO Michael Armstrong -- who sat on Citigroup's board -- in Weill's ultimately successful campaign to become sole Chairman of Citigroup by ousting then co-Chairman John Reed.
The lawsuit charges that Grubman and Weill agreed that as a payback for Grubman's AT&T upgrade, Weill would arrange for Grubman's twin toddlers to be admitted to one of New York City's most prestigious and competitive nursery schools, which was located at the 92nd Street Y.
As in many other major recent cases charging corporate fraud, some of the most revealing documents are e-mails. The complaint alleges, for example, that in January 2001, Grubman gloated in an e-mail about some of his motives for upgrading AT&T. After referring to the AT&T upgrade, Grubman declared in his e-mail that:
"I used Sandy (Weill) to get my kids in 92nd ST Y pre-school (which is harder than Harvard) and Sandy (Weill) needed Armstrong's vote on our board to nuke Reed in showdown. Once coast was clear for both of us (ie Sandy clear victor and my kids confirmed) I went back to my normal negative self on (AT&T)."
In rejecting defendants' motion to dismiss, Judge Lynch noted that "plaintiffs . . . claim . . . that Grubman intentionally lied about his true opinions when he issued research reports for (Salomon) on AT&T, and that these deliberate lies were disseminated with the knowledge and, indeed, encouragement of (Salomon) and Citigroup at the highest levels, up to and including the Chairman of the Board."
Plaintiffs will now have the opportunity to conduct discovery, including reviewing internal Salomon and Citigroup documents, and questioning Weill, Grubman, and other key witnesses under oath.