In the Matter of John B. Hoffmann and Kevin J. McCaffrey

Jack Grubman was the highest-paid research analyst at Salomon Smith Barney, Inc. (SSB) and one of the most prominent analysts on Wall Street. John Hoffmann (defendant) was SSB’s director of global equity research and a member of SSB’s management committee. Kevin McCaffrey (defendant) was a registered representative and SSB’s director of U.S. equity research. All equity-research analysts, including Grubman, reported directly to McCaffrey, and McCaffrey reported to Hoffmann. Hoffmann and McCaffrey participated in Grubman’s annual performance reviews and in determining Grubman’s salary and bonus. Grubman published false research on two companies that minimized the risk of investing in the companies, predicted substantial growth in the companies’ revenues and earnings, failed to disclose material facts, and made material misstatements. The research Grubman published on six companies violated advertising rules of the New York Stock Exchange Inc. (NYSE) and the National Association of Securities Dealers, Inc. (NASD). All of the companies covered by Grubman’s false or violative research were SSB investment-banking clients. The Securities and Exchange Commission (SEC) (plaintiff) filed a complaint, alleging that Grubman aided and abetted SSB’s securities-law violations. Hoffmann and McCaffrey were aware that Grubman played a significant role in attracting telecommunications companies to SSB’s investment-banking business and that Grubman’s involvement in SSB’s telecommunications investment-banking activities posed a conflict of interest. The SEC instituted public administrative proceedings against Hoffmann and McCaffrey pursuant to § 15(b)(6) of the Securities Exchange Act of 1934 (SEA) for their failure to supervise Grubman with a view to preventing his securities-law violations, made findings, and imposed sanctions.