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Updated from 3:38 p.m. EDT

In a move sure to be viewed by some as a slap on the wrist, the

National Association of Securities Dealers



(C) - Get Citigroup Inc. Report

Salomon Smith Barney unit $5 million for issuing "misleading research reports" about Winstar Communications, a defunct telecommunications company.

WinStar was a former Salomon investment banking client that filed for bankruptcy a year ago.

In a related move, the NASD's regulatory arm filed a formal complaint against Jack Grubman, Salomon's former star analyst, who covered WinStar and other telecom companies. The agency also filed a complaint against one of Grubman's assistants, Christine Gochuico.

Third-Largest Settlement

The NASD says the fine and settlement with Citigroup is the third-largest ever negotiated by the regulatory agency. The settlement doesn't address other research issues being investigated by it or other regulatory agencies at Salomon, the NASD said.

But the amount is far smaller than the $100 million fine Merrill Lynch agreed to pay to settle a similar analyst conflict-of-interest investigation conducted by New York Attorney General Eliot Spitzer. And the NASD fine is considerably less than the $240 million Citi is paying the Federal Trade Commission to settle a predatory lending lawsuit.

The early reaction from Wall Street to the settlement was positive. Shares of the bank rose 74 cents, or 2.8%, to $27.57, on a day in which the Dow Jones Industrials plunged 113 points. The shares were as low as $24.42 before the settlement was announced.

Harold Schroeder, a portfolio manger with Carlson Capital, a Dallas-based hedge fund, says the steep decline in Citi's shares this year represents an overreaction by investors to the legal risk posed to the bank by the investigations it faces. He notes the bank has lost nearly $100 billion in market cap -- a figure that's likely to far exceed the amount of money it will ultimately shell out in fines and settlements.

"I think the market reaction has been greater than the actual underlying risk," says Schroeder.

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In settling the case, Citigroup, as is customary, neither admitted nor denied the charges that its research reports for WinStar, a company that paid Salomon more than $24 million in investment banking fees, were misleading.

Citigroup, in a prepared statement, said the settlement is consistent with its wish to resolve all the issues facing its investment banking division.

The NASD said Citigroup's analyst reports on WinStar "did not comply with principles of fair dealing and good faith" and contained "exaggerated, unwarranted, unbalanced or misleading statements."

Both Sides of Mouth

In several internal Salomon emails, the NASD found that Grubman and Cochuico both raised concerns about WinStar's ability to obtain new funding, even as they touted the stock to investors.

The regulators were particularly critical of the buy rating and $50 target price Salomon maintained on WinStar in early 2001 -- a period when the stock was collapsing and the company was spiraling toward bankruptcy. The NASD noted Salomon and Grubman were such staunch defenders of WinStar that they issued several research reports rebuking other brokerage analysts that criticized the ailing company.

Indeed, Salomon and Grubman didn't downgrade the stock until April 17, 2001, when it closed at 14 cents a share. The next day, the company filed for bankruptcy.

Grubman left Salomon in August under fire, after he had become a lightning rod for investor anger over the brokerage's bad stock picks. Lee Richards, Grubman's lawyer, in a written statement, said his client is "extremely disappointed" with the NASD's action and its decision to "file public charges that have no basis." Richards says Grubman's coverage of Winstar "reflected his honest held views." He noted that his client had wanted to downgrade the stock in early April 2001, but "was prevented by the Salomon Smith Barney Compliance Department from doing so."

Gochuico, who is on maternity leave from Salomon, could not be reached for comment. Her attorney Robert Romano says his client is innocent and that the firm "is supporting Christien's efforts to defend herself."

Disincentive to Settle

Some securities lawyers suggested that Grubman and Gochuico had little incentive to settle with the NASD as long as other regulatory and government agencies are still investigating Salomon's business practices. These attorneys suggested the biggest threat either of the analysts faces is not a temporary suspension from the brokerage business -- the usual outcome of any deal with the NASD -- but potential criminal charges.

"Grubman has no reason to settle," says Jeffrey Liddle, a New York attorney representing several former Salomon brokers who worked with Grubman and have filed wrongful termination lawsuits against the investment bank. "I would take my chances with the

NASD. The only thing he is protecting is his license and a little bit of money."

Liddle says Grubman and Gochucio might even be emboldened by the relatively light fine imposed on Salomon.

"What has occurred in this settlement is a serious breach of trust between the NASD and the investing public," says Liddle. "It's an oxymoron to say that $5 million is a serious fine."

But other lawyers say the NASD settlement with Salomon could prove to be an important tool for private litigants, because it can be used as evidence in customer arbitration cases and lawsuits against Salomon.