Salomon Smith Barney's Knowledge of Worldcom's Financial Reporting to be Scrutinized

Salomon's (and J.P. Morgan's) May 2001 underwriting of Worldcom bonds raises questions of what the brokerage firm knew or should have known regarding Worldcom's baking the books.

At the present time, reports indicate that Worldcom's $3.8 billion financial reporting fraud extends back just five quarters. As a result, Salomon argues that its requisite due diligence for the underwriting would not have uncovered the Worldcom fraud.

Salomon's star analyst/cheerleader Jack Grubman reportedly had an unusually close advisory relationship with Worldcom, which dates back to the early 1990s. Only recently (April 22nd) did Grubman reduce his Buy rating on the stock to Neutral. On March 18th he increased his risk rating to "high" but not until after the stock had fallen 89% from its 1999 peak.

Source: Wall Street Journal, June 27, 2002