advice at the eye of Sturm
By Al Lewis,
Friday, December 9, 2005
Denver investor Donald Sturm, 73, once held a stake in
WorldCom worth $1.29 billion.
But Sturm claims he made the same mistake too many other
investors made. He listened to former Salomon Smith Barney
analyst Jack Grubman.
The notorious Grubman has been banished from the securities
industry since 2003, when he settled charges with regulators
that he allegedly issued fraudulent research. Grubman
neither admitted nor denied wrongdoing, but he goes down in
Wall Street history as ... well, Grubman.
Sturm, meanwhile, has invested in airlines, banks, hotels,
real estate, technology and telecommunications. He has a law
school named after him at the University of Denver, where he
graduated in 1958 and last year donated $20 million.
How can a man this wealthy and sophisticated be so stupid as
to listen to Grubman?
It's an easy question to ask in hindsight. But not long ago,
Grubman virtually levitated the telecommunications sector
with his hyperbolic research - for which he was paid as much
as $20 million a year.
To give you an idea of the influence Grubman wielded: When
Qwest founder Philip Anschutz needed a CEO for his
telecommunications company, Grubman introduced Anschutz to
Joe Nacchio in the mid-1990s. And today, with Nacchio
possibly facing insider-trading charges, this stands as
another example of how listening to Grubman can be
Sturm claims he asked Grubman what to do with 21 million
shares he owned in WorldCom. Sturm got this stock when
WorldCom acquired MFS Communications for about $14 billion
in 1996. Sturm had long been an investor in MFS.
Sturm had other telecommunications bets as well. He was an
early investor in Broomfield-based Level 3. And he financed
a now-defunct data-center operator once known as FirstWorld
Communications, then Verado.
This year, the company settled a lawsuit with its
shareholders who had accused Verado of misleading investors.
Before these telecom disasters struck, Forbes magazine
listed Sturm among the 400 richest Americans, with a net
worth of $3 billion in 1999. Sturm hasn't made the list
since. I'm guessing he's kicking himself for listening to
Sturm filed a $900 million claim against Salomon Smith
Barney parent Citigroup Inc. for alleged bad advice he got
from Grubman. In a complaint before the National Association
of Securities Dealers, he said Grubman advised him to hold
on to his WorldCom shares.
In one of the largest NASD claims filed by a single
investor, Sturm said that because he did so much
investment-banking business with Citigroup, he had personal
access to Grubman and that Grubman plied him with flawed
Unlike court hearings, arbitrations before the NASD are not
public. The Wall Street Journal, however, reported Thursday
that a three-member NASD panel ruled in Citigroup's favor.
Citigroup reportedly argued that it is "absurd and
outrageous" that a seasoned businessman such as Sturm takes
no responsibility for his investing decision, the Journal
Grubman reportedly took the stand for two days to defend his
research. Grubman had previously settled allegations of
faulty telecom research, but not for his WorldCom reports.
Sturm's legal team reportedly tried to prove that Grubman's
WorldCom research was flawed - which should not have been
too difficult given what Grubman said, compared with the
condition of these companies today.
It's unknown why the NASD panel ruled the way it ruled since
it ruled behind closed doors. I'm guessing Sturm's case hit
a few bumps.
For one thing, neither Grubman nor Citigroup sold Sturm the
stock. Sturm had held it since 1996, when WorldCom took over
"Holding $1.3 billion in assets in one stock is not very
bright," said Junius Peake, professor of finance at the
University of Northern Colorado and a former securities
dispute arbitrator. "I don't feel too sorry for Sturm."
But I do.
I wouldn't wish Grubman on anyone.
Al Lewis' column appears
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denverpostbloghouse.com/lewis, 303-820-1967, or