SEC: John B. Hoffmann And Kevin J. Mccaffrey Settle Enforcement Actions Based On Their Failure To Supervise Jack Grubman

The Securities and Exchange Commission today issued an Order instituting public administrative proceedings against John B. Hoffmann, formerly the Global Head of Equity Research at Salomon Smith Barney, Inc. (SSB), now known as Citigroup Global Markets, Inc. (CGM), and Kevin J. McCaffrey, formerly the Head of North American Equity Research at SSB, based upon their failure to reasonably supervise former SSB equity research analyst Jack B. Grubman with a view to preventing him from aiding and abetting SSB’s violations of antifraud provisions by publishing fraudulent research. Without admitting or denying the Order’s findings, Hoffmann and McCaffrey each consented to a fifteen month bar from associating in a supervisory capacity with a broker, dealer, or investment adviser and to pay civil penalties of $120,000 and disgorgement of $1.00.

In its April 2003 settled proceedings brought against Grubman and SSB as part of the Global Research Analyst Settlement (Global Settlement), the Commission charged that Grubman issued fraudulent research reports regarding Focal Communications Corp. (Focal) and Metromedia Fiber Networks, Inc. during the first part of 2001, thereby aiding and abetting SSB’s violations of antifraud provisions. The Commission also charged that Grubman published misleading or exaggerated research on Focal, RCN Communications, Williams Communications Group, Level 3 Communications, Adelphia Business Solutions, and XO Communications that violated NASD and New York Stock Exchange rules. Each of these seven firms was an SSB investment banking client.

The Order finds that during 2000 and 2001, Hoffmann and McCaffrey were supervisors of Grubman. During that period, they failed to respond adequately to red flags that Grubman had unrealistically bullish ratings and price targets on companies he covered, in particular the seven companies identified above. In addition, Hoffmann and McCaffrey were aware of potential conflicts of interest posed by Grubman’s involvement in the firm’s telecommunications (telecom) investment banking activities and aware of Grubman’s importance to the firm’s telecom investment banking franchise, but failed to respond adequately to specific evidence of investment banking pressure on Grubman not to downgrade SSB’s investment banking clients.

Subject to court approval, the civil penalties and disgorgement paid by Hoffmann and McCaffrey will be added to the CGM distribution fund established under the Global Settlement pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002.

Separately, NASD and the NYSE have filed settled enforcement proceedings against Hoffmann and McCaffrey based on their parallel investigations into the supervision of equity research analysts at firms involved in the Global Settlement.