With telecom analyst Jack Grubman in New York Attorney General Eliot Spitzer's sights, Salomon Smith Barney is faced with the dilemma of whether to defend or dismiss a man whose name has become synonymous with bubble-era excess.

Grubman, who helped Salomon make hundreds of millions of dollars in investment banking fees over the past several years, has become a poster boy for the conflict-of-interest scandal on Wall Street. While the company's legal liability will remain the same regardless of whether Grubman stays or goes, keeping him could increasingly alienate investors and anger brokers in Salomon's own ranks. Firing him, meanwhile, would mean losing a valuable asset and might be read as an admission of guilt by the public, observers say.

"It's a business decision rather than legal decision," said one securities law expert who preferred not to be named. "Whatever liability is there isn't going to go away."

Widening Circle

As part of a widening investigation into the way analysts make stock recommendations, Spitzer issued a subpoena to Salomon Smith Barney last Thursday requesting documents related to all research produced by Grubman.

Once a highly respected telecom analyst for Salomon, Grubman became a major deal broker in the telecommunications sector, drumming up $809 million in underwriting fees on telecommunications stocks and bonds for Salomon, and $178 million providing merger advice, between 1997 and 2002, according to Thomson Financial.

His stock picks haven't done quite as well for investors in the past few years.

Grubman maintained a buy rating on banking client



between February 2000 and June 2001, only downgrading it to a neutral on June 11 when the stock had already fallen 60% to $17.75, according to Investars.com. He downgraded another banking client,

Level 3 Communications


, to neutral from buy on June 18 of last year, only after that stock had fallen to $6.43 from $60.69 at the time he first rated it a buy.

And the analyst famously reversed his rating on


(T) - Get Report

shortly before helping Salomon win a lead role in the $10.6 billion IPO of its

AT&T Wireless


unit. Previously vocally bearish on the stock, he rated AT&T a buy in November 1999. Since then the stock has plunged to $12.86 from about $33.

The Appearance

While Grubman certainly can't be blamed for the telecom meltdown, in some cases the timing of his recommendations and the banking relationships his firm held with the companies he plugged seem to be more than coincidental.

Spitzer's subpoena to Salomon follows a civil suit filed against Grubman on April 12 by New York attorney Jacob Zamansky, who won a $400,000 settlement from Merrill Lynch for another client last July for stock recommendations made by Henry Blodget. Highlighting the growing seriousness of the allegations, the

Securities and Exchange Commission

joined the investigation into analyst conflicts of interest Thursday.

For now, Salomon says Grubman's role hasn't changed and that it has made no effort to replace him.

But some Salomon brokers, worried about protecting themselves from lawsuits and preserving relationships with clients, may feel differently. According to

The Wall Street Journal

, some of Salomon's own senior sales staff have launched a campaign to replace Grubman with Friedman Billings Ramsey telecom analyst Susan Kalla, who has a reputation for being more bearish on telecom stocks. Grubman didn't return calls seeking comment, and Kalla declined to comment.

At least one securities lawyer thinks Salomon should wait to see what kind of evidence is uncovered in the investigation. "If Grubman's files and those of Salomon Smith Barney are replete with emails and internal memoranda such as those at Merrill Lynch by Blodget, then it would be wise to cut your losses," said J. Boyd Page, an Atlanta securities lawyer with Page Gard Smiley & Bishop.

"However, if their investigation were to reveal that he was truly a believer, perhaps misguided, but had reached his conclusions in a reasonable manner, the reaction would be significantly different," he said.


Either way, getting rid of Grubman probably won't limit Salomon's legal liability. "The problem for Salomon has been this close tie between analyst compensation and investment banking deals, the inherent conflict of interest there. That's less Mr. Grubman's problem than the system's problem," said Page.

Among the documents Spitzer is said to be seeking from Salomon are any records showing how its analysts or research department are compensated for investment banking deals. One non-Salomon analyst who preferred not to be named said that at least 50% of an equity research department's pay typically comes from investment banking deals.

Merrill, for example, is far from off the hook despite Blodget's departure last November, when the brokerage offered him an estimated $2 million buyout package. The firm is currently working to settle with Spitzer after he unearthed now-infamous company emails in which analysts privately disparaged stocks they were recommending to investors. The company publicly apologized for the emails last Friday, but could face a large regulatory settlement.