Wall Street's Highest-Paid Analyst Held a "Buy" Rating on WorldCom Through a 90% Crash. He Attended Board Meetings. He Never Said "Sell."

Jack Grubman was the most powerful telecom analyst on Wall Street, earning $20 million a year at Salomon Smith Barney. He was so close to WorldCom CEO Bernie Ebbers that he attended board meetings and played pool with him regularly — a relationship that today would trigger every conflict-of-interest alarm in existence.

As WorldCom stock plummeted from its $64 peak in June 1999, Grubman stood firm. Down 50%? Buy. Down 75%? Still a buy. Down 90%? He finally moved to "neutral" in April 2002. On June 25, 2002, with the stock at 91 cents and WorldCom's $115 billion market cap reduced to $2.7 billion, Grubman issued his boldest call yet: "underperform."

Not "sell." Never "sell."

The very next day, WorldCom announced it had fraudulently inflated earnings by $3.8 billion. The company filed for bankruptcy within a month — the largest in U.S. history at $107 billion in assets.

Grubman claimed he had no advance knowledge of the fraud, despite literally sitting in on board meetings. He was fined $15 million and permanently banned from the securities industry. Bernie Ebbers got 25 years in prison.

The moral: When your analyst is playing pool with the CEO, maybe get a second opinion.