Two Salomon Smith Barney brokers charged with a number of customer complaints by WorldCom employee-shareholders have filed a cross-claim against the firm and a third-party claim against its high-profile telecom analyst, Jack Grubman, Registered Rep. has learned. The brokers, Phillip Spartis and Amy Elias, accuse Smith Barney of settling the WorldCom suits, rather than defending them, thereby destroying the brokers' prospects in the brokerage business. Grubman is named in their complaint because, the brokers allege, the WorldCom clients ignored their advice to diversify their holdings because Grubman continued to say the stock would rise. It is the first time brokers have sued for damages from a firm's research analyst.
Spartis and Elias are represented by New York attorney Jeffrey Liddle, who won a $26.7 million arbitration for former Waddell & Reed broker Stephen Sawtelle last August. The claims were filed on Feb. 22 with the NASD. Liddle is seeking an undetermined amount to compensate his clients for the loss of their brokerage business and the ruin of their careers.
Spartis and Elias had built what they say was a $2 billion book by handling the stock options exercises for WorldCom employees--including some top executives. The complainants say that clients were counseled by Spartis, Elias and other brokers in the Atlanta corporate client group to use margin and maintain a concentration in WorldCom stock that was unsuitable for them. More than 25 complaints have been issued against several brokers, seeking about $35 million.
Spartis and Elias were terminated and are now out of work. Their $2 billion book of business has been handed off to other brokers at the Smith Barney branch.
In exclusive interviews in Registered Rep's March issue, Spartis and Elias tell their full story. They insist that they attempted to give their clients prudent advice, but they say that Grubman’s research reports convinced people to continue to hold aggressive positions in WorldCom stock and, in some cases, to leverage those positions with margin. When WorldCom shares started to drop, they say, Smith Barney's internal systems did not enable them to properly monitor accounts that were hit with margin calls and were falling into negative equity. The brokers say they’re being made scapegoats of for the lack of overall supervision and because of the prominence of Grubman, who has maintained a buy recommendation on WorldCom through the last three years. WorldCom shares were lately at around $7, down more than 90% from their peak. "We’d talk about hedging, and stops, and Jack would say, ‘Higher, higher, higher, and they would bring in outside assets to shore up [their accounts] when the next decline happened," Spartis said. Neither Salomon Smith Barney nor Grubman would comment.
A number of the claims brought against the brokers have been settled, according to NASD filings. Spartis and Elias resisted settling, because the information on their U-4 records would, they say, amount to an admission of guilt and make re-employment in the brokerage business impossible. The various complaints on their U-4 forms charge that the pair "improperly handled accounts," "engaged in breach of fiduciary duty, fraud and negligent misrepresentation, unsuitability and violation of state and federal statutes," and also charge them with fraud and misconduct. "We wanted to defend ourselves, and we thought that’s what was going to be happening," says Elias. Signing the complaints and agreeing to settlements, she says, "is like saying we were guilty." Spartis and Elias were notified that they were terminated on Feb. 4.
The March issue of Registered Rep., with the full story, will reach subscribers the first week of March.