Here's a question for

Citigroup

(C) - Get Report

investors to ponder: When does a major asset become a big liability?

No, this isn't an issue of corporate accounting at the nation's biggest financial-services firm. It's a question of what to make of star telecom analyst Jack Grubman, who was on the hot seat again Monday for his role in the rise and fall of telecommunications giant

WorldCom

(WCOME)

.

There's little denying that Monday's spectacle on Capitol Hill, which found Grubman fielding questions from congressional leaders about the accounting mess surrounding WorldCom, is a black eye for Salomon Smith Barney, Citigroup's investment banking arm. An investment bank naturally shies away from having its all-star analysts hauled before the TV cameras, even if the most pressing questions concern board meetings attended and paychecks cashed.

A Citigroup spokeswoman wouldn't comment on whether Grubman, a longtime WorldCom bull who recommended selling the stock only a day before the company unveiled $4 billion in accounting regularities, had become a liability for the Wall Street firm. Regardless, the latest frenzy only adds to a growing number of storms swirling around the onetime telecom sage -- including a growing list of customer complaints.

Demeanor

Grubman's demeanor before the House Financial Services Committee probably did him no favors. Grubman was largely unapologetic and at times testy, both in his prepared statement and in answering the panel's questions. While acknowledging that he may have misjudged the telecommunications industry's underlying economic weakness, Grubman insisted he had no advance knowledge of the $4 billion accounting fraud at WorldCom -- a company he often referred to in research reports as a "must-own stock."

If anything, Grubman, who earned a $15 million paycheck at the height of the telecom craze in 1999, tried to make himself into a much smaller player on the telecom stage than investors had been led to believe. Yes, Grubman said he had close relations with executives at WorldCom and other telecommunication firms. But that wasn't an attempt to win lucrative investment banking work for Citigroup. Rather, Grubman says he just wanted to get a better understanding of the companies he was covering.

In the most confrontational segment of his testimony, Grubman confirmed earlier press reports that he had attended several WorldCom board meetings. But again, the star analyst tried to minimize his role and presence at the meetings. He said his purpose at the meeting was the provide the WorldCom directors with some insight, or "market color," about how investors would react to certain potential merger transactions. Grubman said he didn't share any of the inside information he picked up at those meetings with anyone else, until the information became public.

As for being snookered by the apparent fraud at WorldCom, Grubman said an analyst can only rely on the numbers that a company publicly reports. "We are not auditors," he told the panel. Investment bankers at Salomon never influenced his decisions, he said.

Tally

Looking at his record of riding once-hot stocks down into the pennies, investors might agree with those last assertions. In the courts and arbitration hearing rooms, Grubman and Salomon are under siege right now because of his bad stock calls. The most recent tally reveals that Grubman has been named as a defendant in 16 pending arbitrations and customer complaints, two federal lawsuits and one action filed in New York state court.

In all, the investors filing arbitration claims against Grubman are seeking a combined $11 million in damages, according to records on file with the National Association of Securities Dealers. The claims stem from losses investors allegedly incurred from buying shares of

Global Crossing

and WorldCom on the basis of Grubman's past recommendations.

Citigroup believes the claims leveled against Grubman are "baseless," the spokeswoman says, adding that the company is defending Grubman in all the claims that have been filed against him and the brokerage firm.

"It's an incredible number of arbitrations for an analyst," says Mark Maddox, an Indianapolis securities lawyers and a past president of the Public Investors Arbitration Bar. "It's a lot for a broker."

In fact, some people say that with telecom stocks in the dumps, the industry still mired in a deep recession and Grubman's reputation tarnished, the only reason Citigroup may be keeping its onetime star analyst on the payroll is to present a unified legal strategy in the various litigations. "If you show him the door, he could become unhappy and not cooperate in the defense strategy," says Maddox. Similarly, Jeffrey Liddle, a New York lawyer who represents two former Salomon Smith Barney brokers in a dispute with their former employer, says Citigroup "needs

Grubman's testimony." Citigroup didn't comment.

Tough Call

That said, some lawyers say it's no surprise that a new arbitration claim is being filed almost weekly against Grubman. "It's the suit du jour," says New York securities lawyer Bill Singer. Singer says many of these cases will probably end up getting dismissed because it's difficult for investors to show that they actually purchased a stock based on the recommendation of an analyst. He says an investor's broker usually has much more sway over an investor than an analyst -- even a star analyst.

Indeed, while there's been much speculation this spring's Merrill Lynch settlement will result in a tidal wave of arbitration awards against research analysts and brokerages, history shows that it's awfully difficult for investors to prevail in these cases. The Securities Arbitration Commentator of Maplewood, N.J., reports that since 1989, there have been just 25 successful arbitration cases brought by investors against a Wall Street analyst. During that same time, arbitrators issued some 30,000 awards against brokers and brokerage firms.

But even with those long odds, Richard Ryder, editor of the Securities Arbitration Commentator, says he's not surprised that investors are zeroing in on analysts like Grubman. "He's the public face," says Ryder.