Tech bubble banker down by law
Contempt for SEC sank Frank Quattrone
At least one Google shareholder may be watching the search engine's forthcoming IPO from behind bars. Frank Quattrone, The dotcom era's most successful banker and one of Silicon Valley's wealthiest denizens, was found guilty of obstruction of justice this week. For Quattrone, it was the cover-up, and not the crime that sealed his fate.
For almost a decade, Quattrone was a fund-raiser and deal-maker for technology companies and was instrumental in taking over a hundred start-ups public, with one of the first, Netscape, setting the template. Many more including Amazon.com and Cisco followed. In 2000 he personally earned $120m.
Quattrone was head of Credit Suisse First Boston's technology group in Palo Alto when a Federal Grand Jury began to investigate unusually high commissions paid to Quattrone's team by hedge funds. At the height of the bubble, institutional investors clamored for pre-allocations of dotcom companies about to IPO, knowing that such placements could earn a hefty first-day profit. Quattrone denied being involved in the allocation business, insisting that it was CSFB's sales team which decided who got what, a decision only made in the final few days of the IPO process.
The regulatory watchdog had every reason to investigate Quattrone, whose "Friends of Frank" club of CEOs was to become emblematic of the era's happy money-go-round. In 15 months between April 1999 and June 2000, the bank allocated hot IPO stock to more than one hundred of its customers, who "funneled" between a third and two thirds back to CSFB as over-the-top commissions. CSFB, in line with several other institutions, linked favorable analyst coverage to loyalty to its banking business.
In June 2000, Quattrone had been advised by a CSFB lawyer of the regulator NASD's investigation and instructed to obey the Bank's strict new document retention policy. The instruction specifically related to VA Linux's IPO, and the warnings were repeated multiple times between June and December. That month, with a Federal Grand Jury investigation imminent, Quattrone urged his staff in an email to pay attention to a warning to "catch up on file cleanup" for the holidays.
On Monday, the jury at a second trial found him guilty of obstruction of justice. Quattrone had plenty of friends in Silicon Valley. "He offered me competence, not petty bribes," wrote TJ Rodgers, president and CEO of Cypress Semiconductor, whose IPO was managed by Quattrone. "He and his team were and are extraordinarily competent, honest and ethical." Incredibly, many of these friends fail to see what Quattrone did wrong.
But this week, jury members explained why. "With more power and control come greater responsibility," one, a software entrepreneur, told the San Jose Mercury News. "It was unreasonable for Frank Quattrone not to be fully aware of what he was doing when he sent the email," he added. "He was bobbing, weaving and evading questions expertly."
Ironically, Quattrone was not found guilty of deceiving investors, but for his contempt for the regulatory process: a legal safety net that was introduced in the New Deal to prevent ordinary shareholders being fleeced during a speculative bubble.
Quattrone's attitude typified that of many in Silicon Valley, for whom securities regulation is an unwelcome intrusion into the pristeen clockwork of the technology market. Alas, such is their contempt for these safeguards, many of Frank's Friends still can't see what sank him. The old boy network continues to reward Quattrone however: he has been blessed with Google stock and his old firm CSFB will handle the search engine's auction.
The scofflaw banker, who is on bail until sentencing on September 8, plans to appeal. ®