Administration May 4, 2004

NASD Reaches Settlement With Smith Barney Analyst

April 5, 2004 (PLANSPONSOR.com) - The National Association of Securities Dealers (NASD) has reached a settlement with a former Salomon Smith Barney analyst who maintained abnormally high price targets in Winstar Communications, a company that had an investment banking relationship with the firm.

Reported by

Eric Hazard

Per terms of the settlement, Christine Gochuico, a former vicepresident and telecommunications research analyst for Smith Barney, agreed to a $100,000 fine and a six-month suspension from the securities industry. For an additional 18 months following her suspension, Gochuico is prohibited from allowing her name to appear on, or otherwise be publicly associated with , any broker-dealer’s research report, advertisement or salesliterature, according to a NASD release.

The settlement comes as part of a September 2002 complaint filed by the NASD against Smith Barney, Gochucio and Jack Grubman, formerly Managing Director of Smith Barney’sEquity Research Department. Specifically, the NASD contends that between January and April 2001, Gochuico assisted Grubman in analyzing Winstar and drafting research reports that containedmisleading statements and omissions and an unreasonable price target for thecompany.

During that time period, Smith Barney’s research reports recommended apurchase of Winstar with a “Buy” rating and a target price of $50 per share – while the price of Winstar fell more than 99%, from approximately$20 per share to $0.14 per share. What really blew the lid off of the case was an email sent by an unnamed institutional investors questioning Gochuico’s analysis. The email read:

“Why do you guys use 12% perpetual FCF [free cash flow] growth for your terminal multiple?? Seems a little high to me, especially considering that the US and World economy has at best 3% LT sustainable growth rate – using 12% [Winstar’s free cash flow] is pretty soon 100% of the US GDP [gross domestic product] (actually a little over 100 yrs).”

Gochuico replied:

“There really is no good reason – except the unwillingness to change our Target Price for optics; although I would admit $50 per share is shall we say – extremely aggressive. Typically we try to keep our FCF growth rates to about 10% (by changing the terminal multiple) which would bring our target down to about $24 (using a 9x FV[firm value]/EBITDA [earnings before interest, taxes, depreciation and amortization] multiple). At a 7x FV/EBITDA multiple (similar to Bells) the DCF value is $15.”

This exchange raised eyebrows at the NASD who then investigated Smith Barney’s “significant investment banking relationship” with Winstar. Following its investigation, NASD charged Gochuico’s with a violation of the NASD’sadvertising rules, which require that publishedresearch reports have a reasonable basis, present a fair picture of theinvestment risks and benefits, and not make exaggerated or unwarrantedclaims.