The man considered the number-one Internet-era dealmaker - earning over $200 million in four years with deals that included bringing Amazon.com public and building his bank into a high-tech powerhouse - has crashed. Just two days after he resigned from Credit Suisse First Boston, Frank Quattrone was hit with a civil complaint that he did it by way of cooked research and public-offering practices.
Accusing Quattrone of creating what amounted to a "firm within a firm" at Credit Suisse First Boston, the National Association of Securities Dealers (NASD) filed a complaint accusing Quattrone of running an organizational structure that badly undermined research analyst objectivity. They also filed another, separate complaint, accusing Quattrone of refusing to cooperate with the group's probe of whether he pushed Credit Suisse's tech group workers to destroy documents after he learned both the NASD and the federal government were looking into his activities beginning in May 2000.
The NASD - the self-regulatory group who watches over both the securities industry and the mostly high-tech NASDAQ stock market composite - filed the complaints in New York March 6. Two days earlier, Quattrone quit Credit Suisse under company pressure. And his troubles may not end with civil actions: the office of New York attorney general Eliot Spitzer is said to be moving on a criminal investigation.
"Recent investigations into conflicts of interest on Wall Street have shown that in too many cases in the past, investors' interests were compromised for greater investment banking revenues," NASD vice chairman and president of regulatory policy Mary L. Schapiro said in a formal statement. "In restoring integrity to our markets and investor confidence in our industry, it is absolutely necessary that we hold individuals responsible for these abuses accountable. Institutions can only act through people and when individuals violate our rules, enforcement actions with meaningful sanctions must follow."
Quattrone is accused of being a kind of spin doctor to win and sustain banking business - pushing subordinates to build and offer biased stock and other financial research analysis, giving access to prime initial public offerings to selected corporate executives who might then influence their subordinates in choosing investment bankers. These practices, the NASD said, got even more aggressive among Credit Suisse's Tech Group under Quattrone's push.
Quattrone can ask for a hearing before an NASD disciplinary panel, under the group's rules. But if he does, the actions he could face include a heavy fine, censure, suspension, or an outright ban from the securities industry, not to mention having to give up whatever part of his fortune was deemed to have come by way of his research and public offering cooking, and making restitution.
The Securities and Exchange Commission began looking into Quattrone's activities with NASD, the New York Stock Exchange, and other regulators conducting the nuts and bolts.
"In making presentations to prospective investment banking clients, the Tech Group held out access to IPO shares as an inducement to the prospective client's officials," NASD spokespersons Nancy Condon and Michael Shokouhi said in a statement. "The group also identified 'strategic' technology company insiders and ranked them according to their perceived ability to influence their companies' choice of investment bankers."
Condon and Shokouhi said there were over 300 accounts at the strategy's peak which were known as "Friends of Frank" accounts. "Through managed discretionary trading accounts, the Tech Group allocated IPO shares to such individuals and, in aftermarket trading, flipped shares back to CSFB, producing substantial profits for the owners of the accounts."
The Tech Group also avoided diluting the accounts by discouraging their owners from trading in the accounts themselves, Condon and Shokouhi continued, while the group made sure the owners knew how much money was being made for them by sending them monthly unofficial reports "enumerating realized and unrealized gains and rates of return." The problem: this amounted to giving those account owners cash gifts, a violation of the NASD's rules on gifts and gratuities.
The Tech Group was also accused of getting and keeping business by dangling prospects of favorable Credit Suisse research about possible clients. Condon and Shokouhi said the Tech Group built "pitch books" for presentations to these prospects, including "excerpts from favorable research reports prepared by Tech Group analysts for other CSFB client companies." Quattrone, they said, built the incentive for such positive research coverage by linking Tech Group analysts' compensation to investment banking revenue while "encouraging investment bankers to participate in analysts' performance evaluations.
"He also allowed issuers to review and comment on draft research reports, including proposed recommendations and price targets," they continued. In other words, cooking the research analysis books in something of the same way accountants can cook the revenue books. "These practices compromised the independence and objectivity of the Tech Group's analysts."
The second of the two NASD civil complaints accuses Quattrone of ducking a date to testify before the group about whether he pushed the Tech Group to disappear documents after he was told of the investigations as early as June 2000. NASD said that, in September 2000, Quattrone was told the SEC was looking into his practices, while he was told of a federal grand jury probe in early December 2000. But they turned up a December 5, 2000 e-mail from Quattrone to the Tech Group encouraging them to "cleanse their files," the NASD said.
Credit Suisse and the NASD had earlier settled other charges related to the IPO profit sharing probe, the NASD saying Credit Suisse paid them and the SEC $100 million to settle those charges.
