Winstar Communications, Inc.
At the end of February 2001, Winstar announced “strong fourth quarter results” to the applause of seven major Wall Street Firms that followed the company. Before the announcement, he composed five letters to Winstar, requesting an explanation for a number of irregular financial transactions reported in its financial statements. When he did not hear from Winstar, he published four reports on his web site.
Jack Grubman was among the analysts touting Winstar. At the time, Mr. Grubman was one of Wall Street’s most famous analysts, working for one of its most powerful firms, Citibank Smith Barney. Mr. Grubman criticized his research reports on Winstar and repeated his strong buy recommendation despite the obvious problems with the company’s financial statements.
A few weeks later, Winstar announced its bankruptcy. Soon after, Jim Cramer published “Jack Grubman Follows Winstar to Shame” at TheStreet.com. Cramer rebuked Grubman for dismissing Asensio and credited Asensio with understanding the [CLEC] industry far better than Grubman.” According to Cramer, Asensio predicted Winstar’s demise “almost to the day.” In July 2001, The Wall Street Journal publicized the obvious conflict that resulted in Mr. Grubman’s disingenuous Winstar promotion. The high profile story increased investors’ awareness of conflicts between investment banking and sell side research. By July 2002, regulators approved new disclosure rules to prevent future occurrences of these types of events. |
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