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Bad advice at the eye of Sturm
By Al Lewis, Business Columnist
Denver Post
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 dangerous.

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 Grubman.

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 advice.

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 reported.

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 MFS.

"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 Sunday, Tuesday and Friday. Respond to Lewis at, 303-820-1967, or