Regulators put Citigroup's Sandy Weill on the hot seat, grilling him about circumstances behind a suspicious upgrade of AT&T by the bank's former high-flying telecom analyst, sources told The Post.
And Weill is due for a third-degree before New York Attorney General Eliot Spitzer this week, sources familiar with the probe said.
The National Association of Securities Dealers called Weill - Citigroup's chairman and chief exec - on the carpet to testify under oath as to what he knows about the upgrade of AT&T by Jack Grubman in 1999, just before the bank won a huge $43 million in fees from an underwriting for the giant telecom.
At issue in the probe by regulators is that Grubman had always had a negative rating on AT&T until a month before Citi took AT&T wireless public.
After Citi racked in $43 million in fees, Grubman again lowered his rating on AT&T - prompting regulators to believe that the research rating was given purely to win the investment banking fees.
Moreover, Weill sat on the board of AT&T and Michael Armstrong, the chairman of AT&T, sat on Citi's board. Weill said earlier this month that he will step down from AT&T's board.
Regulators have been led to believe by sources that Grubman may have been pressured by Weill to change his rating.
Grubman had a very vocal history of dismissing AT&T as a "dinosaur" and preferring "new economy" businesses like Global Crossing. Weill has denied he ever "told an analyst what to write."
The NASD is investigating a wide range of research practices at the nation's biggest bank.
Last month, Citigroup paid $5 million to settle with the NASD regarding allegedly misleading research on another telecom, Winstar Communications.
Citi neither admitted nor denied the allegations. The NASD also charged Grubman and an assistant with writing allegedly misleading research. Both are fighting the charges and will respond on Nov. 11, sources said. Grubman's spokesman declined to comment.
A Citigroup spokeswoman said, "As always, we cooperate with regulators."
Weill volunteered to testify before Spitzer, who is also probing the AT&T upgrade.
An NASD spokeswoman declined to comment.