Question: Swapping Personal Favours?

Jack Grubman was a powerful man on Wall Street. As a star analyst of telecom companies for the Salomon Smith Barney unit of Citigroup, his recommendations carried a lot of weight with investors. For years, Grubman had been negative about the stock of AT&T. But in November 1999, he upgraded his opinion on the stock. According to email evidence, it appears that Grubman's decision to upgrade AT&T was not based on the stock's fundamentals. There were other factors involved. At the time, his boss at Citigroup, Sanford Weill, was in the midst of a power struggle with co-CEO John Reed to become the single head of the company. Meanwhile, Salomon was looking for additional business to increase its revenues. Getting investment banking business fees from AT&T would be a big plus toward improving revenues. Salomon's efforts at getting that AT&T business would definitely be improved if Grubman would upgrade his opinion on the stock.

Furthermore, Weill sought Grubman's upgrade to win favour with AT&T CEO Michael Armstrong, who sat on Citigroup's board. Weill wanted Armstrong's backing in his efforts to oust Reed. Grubman had his own concerns. Although he was earning tens of millions a year in his job, he was a man of modest background. He was the son of a city employee in Philadelphia. He wanted the best for his twin daughters, which included entry to an exclusive New York City nursery school-a school that a year earlier had reportedly turned down Madonna's daughter. Weill made a call on Grubman's behalf to the school and pledged a $1 million donation from Citigroup. At approximately the same time, Weill also asked Grubman to "take a fresh look" at his neutral rating on AT&T. Shortly after being asked to review his rating, Grubman turned positive, raised his rating, and AT&T awarded Salomon an investment-banking job worth nearly $45 million. Did Sanford Weill do anything unethical? How about Jack Grubman? What do you think?