TCS Daily

The Peculiar Prosecution of Frank Quattrone

By John E. Tamny - May 6, 2004 12:00 AM

Former star investment banker Frank Quattrone was found guilty Tuesday of allegedly trying to obstruct a federal investigation into Credit Suisse First Boston's IPO allocation processes. USA Today noted that Quattrone "is the first prominent Wall Street insider to face jail time since former 1980s junk bond king Michael Milken was sentenced in 1990."

The Milken comparison is apt, because history will show that just as Milken was needlessly prosecuted, so too was Frank Quattrone.

In his book "The Seven Fat Years," the late Robert Bartley's classic account of the 1980s economic revival, the author noted that he could not dispute the assertion that companies funded by Michael Milken's high yield bonds "accounted for nearly all the job growth in the decade of the 1980s."

Picking up where Bartley left off, University of Chicago law professor Daniel Fischel wrote in his legal account of the Milken era ("Payback") that there was "certainly no evidence that he (Milken) engaged in any conduct that had ever before been considered criminal."

Just as Michael Milken's innovative financial concepts revolutionized the way business was done in the '80s, Frank Quattrone helped set the stage for the late '90s technological revolution in Silicon Valley. As Valley eminence William Hambrecht told the New York Post in 2003, the man who brought Cisco, Netscape, and Amazon (among others) public, "bought into the scale of what was happening in Silicon Valley quicker than anyone else."

Milken brought financing to the 99% of the companies shut out of the corporate debt markets; Quattrone helped fund some of the most life enhancing technological advances that that his generation will ever know.

Disagree? Try for a week, a day, or even an hour to do without the Internet. Interested in booking a vacation, doing research on a potential employer, or finding the best deal on a mortgage? Picture for a moment doing any of the three without the Internet. When thinking about booking a vacation, try to remember what it was like pre-Internet to comparison shop on the phone for airfares.

Even the companies that he did not take public still owe Quattrone a big debt of gratitude. The public offering of Netscape shares surely launched the Internet boom; Morgan Stanley and Frank Quattrone lead managed the deal.

So it's assumed that Frank Quattrone might have obstructed the investigation into the allocation of IPO shares. The "evidence" was an e-mail that Quattrone forwarded to his employees that said they should follow CSFB's document retention policy, and "clean up" their files. Smoking gun? Robertson Stephens founder Sandy Robertson could find nothing wrong with Quattrone's e-mail.

When asked last year about the order to clean up the files, Robertson told the New York Post that after "every deal you always remind people to destroy the files so [trial lawyer] Bill Lerach can't come and sue you."

Files or no files, was anything done wrong?

An article on the front page of today's Wall Street Journal noted that Quattrone's technology group delivered shares "of the hottest IPOs to the personal accounts of corporate executives in the expectation that investment-banking work would follow."

True, but would it have made any difference? It's common knowledge that Frank Quattrone was and is revered in Silicon Valley. To presume that the centimillionaires and billionaires that populate Silicon Valley would have steered deals away from the Valley's best technology banker for lack of IPO goodies (and five figure profits) is absurd.

Alas, the Journal's assumption of a quid pro quo is provably untrue. Despite a largely non-existent IPO calendar in the last couple of years, the investment banks (CSFB, Goldman Sachs and Morgan Stanley) most associated with the IPO boom were still at the top of the M&A league tables in 2003.

USA Today's lead article parroted the Wall Street Journal's and said Quattrone was accused of "steering hot initial public offerings to favored executives." While once again true, and legal, "America's Newspaper" left out that the biggest beneficiaries of hot IPO allocations were large mutual fund firms like Fidelity and Alliance; meaning the small investor was the real beneficiary of Quattrone's "spinning" activities.

Returning to the legal merits of the government's case, Frank Quattrone is not charged with accepting kickbacks, and the allocation process that's been demonized by Eliot Spitzer et. al. is as of today perfectly legal. He was convicted of obstructing justice, but one of the foremost technology bankers in the world is on record as saying the actions that won Quattrone his convictions were perfectly routine.

The above in mind, just as Michael Milken was imprisoned for conduct that had never before been considered criminal, it can be argued that the legal "goalposts" were similarly moved to the detriment of Frank Quattrone.

Legalisms aside, the stock markets fell in the '80s when it became apparent that Michael Milken and his ilk were going to be reined in. While it's not a perfect correlation, until the Google IPO announcement, Silicon Valley has been pretty quiet since Frank Quattrone was banned from the technology banking business. Does anyone doubt that Silicon Valley misses one if its greatest financiers?

Daniel Fischel called what happened to Michael Milken "a national disgrace." I'll wager that with hindsight Frank Quattrone's prosecution will similarly garner negative praise.


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