WorldCom: Top analysts under fire

ONLY half of Wall Street's top telecoms analysts were advising their clients to sell shares in disgraced WorldCom ahead of its massive fraud disclosure yesterday and some rated the company a 'strong buy'.

The poor performance of many of Wall Street's company researchers was revealed as Eliot Spitzer, the New York attorney general, said he had unearthed more Merrill Lynch-style malpractice and US congressman John McCain called for dishonest analysts to be jailed.

Salomon Smith Barney powerbroker analyst Jack Grubman, a close friend of former WorldCom chief executive Bernard Ebbers, said he was shocked by news of WorldCom's $4bn (£2.7bn) fraud, though two days ago he cut his rating on the firm to 'underperform' from 'neutral'. 'Nobody saw this coming, I'm no different than anyone on Wall Street,' said Grubman, a one-time boxer who rose from a blue-collar neighbourhood in Philadelphia to Wall Street's top echelon. Now he and other analysts are fighting to salvage their reputations as questions swirl about how they could have been so blind to financial high-jinks at companies such as Enron, Global Crossing and WorldCom.

The banks with egg on their faces are Robertson Stephens, which on Wednesday downgraded WorldCom shares to 'market underperform' from 'strong buy'. Its analyst Jim Friedland, caught by surprise that the company's books had been cooked, noted: 'We regret that we must make this call when it is too late to help investors stem losses.' Bear Stearns' analysts maintained 'strong buy' ratings until this week.

Spitzer, without naming names, said other Wall Street firms had engaged in identical behaviour to Merrill, which recommended customers buy shares that it regarded privately as rubbish. He said criminal charges were still a possibility. Spitzer was addressing congressmen, one of whom, McCain, said: 'I wish you would put someone in jail. Until someone goes to jail, I'm not sure these people are going to get the message.'

AG Edwards' analyst Anthony Ferrugia was among the few sceptics who put a strong sell on the shares last April, when the price was about $5. Two years ago, World-Com shares fetched $50.

Grubman reportedly earned more than $20m a year in the market's heyday, helping Salomon Smith Barney attract investment banking fees from telco executives whose companies he covered. His high salary and familiar face on TV talk shows have made him a poster boy for the perceived conflict between banking and analysis.

First Call analyst Joe Cooper said: 'Greed fostered this environment of corporate malfeasance.'

After months of dithering, the House on Monday approved a near-doubling of the annual budget for the Securities and Exchange Commission market police to $800m, joining the Senate which voted earlier on a similar provision.

Lawmakers, however, remain divided on broader reforms. Critics say US laws should be clearly written to make it a crime for an analyst to be involved in investment banking activities. Moves by Merrill Lynch as part of a settlement with the New York attorney general's office to strengthen the wall between divisions don't go far enough to assure independent analysis of corporate balance sheets, many believe. 'Wall Street analysts get paid a lot not to rock the boat,' says Howard Schilit, director of the Centre for Financial Research & Analysis.