March 4, 2002
Advice and Consent: Where Does Buck Stop on Losses?
Edited by Robin Goldwyn Blumenthal Barron’s

Who’s accountable for the big losses that some investors have suffered on telecom stocks? In many cases, the courts will decide the issue. But for one claim involving a broker, the buck — or more precisely, 600,000 of them — appears to have stopped squarely at the coffers of Salomon Smith Barney.

That’s the latest development in a bizarre drama that has pitted two former brokers against the firm after they and SSB were charged in an NASD complaint with giving bad advice to WorldCom employees on their stock-option portfolios. The brokers, contending that they aren’t at fault, are suing their former employer and its star telecom analyst, Jack Grubman, who’s been credited with helping SSB win coveted investment banking business in the sector before it imploded. The brokers, Amy Elias and Philip Spartis, left the firm in early February; their claim says their jobs were terminated, but an SSB spokeswoman says their employment was severed for job abandonment after extended absences.

Elias and Spartis, who were part of a broker team named in the WorldCom workers’ complaint against them and SSB, claim it was Grubman’s overly bullish calls on WorldCom, not their advice, that caused clients to hold the stock while it was falling. Grubman, who didn’t comment, has been criticized for recommending WorldCom and other telecom stocks long after they started sliding.

SSB and Elias and Spartis agree on their defense that they tried to get the WorldCom employees to diversify their holdings. But the SSB spokeswoman said the ex-brokers’ counterclaim was “without merit,” and that it was “almost ridiculous” to suggest that the brokers or their clients hinged their entire strategy on one analyst’s ratings. She said a Wall Street Journal story saying the firm was talking to other people for Grubman’s job was “categorically untrue.”

Jeffrey Liddle, an attorney for Elias and Spartis who won a $27.6 million award for a former Waddell & Reed broker, claims his clients were fired because they hired him, but the SSB spokeswoman strongly contested that. Lawrence Klayman, an attorney for some WorldCom claimants, confirmed there have been some settlements, and said that’s the reason the brokers sued SSB, to point the finger at someone else.

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