TCS Daily


Hurray for Frank Quattrone; Rotten Tomatoes for the Media

By David R. Henderson - August 28, 2006 12:00 AM

Hurray for Frank Quattrone. It has to be said. The evidence seems to suggest that he was innocent. And even in the unlikely case that he was guilty, the prosecutor never made the case beyond a reasonable doubt, the standard for conviction for a crime. What wasn't a victory, though, was the media's role in this. Many reporters pandered to their audiences' desire to see a wealthy man take the fall because of the dotcom bust. All of this in due course. But first some background.

The Setting

Frank Quattrone was a major investment banker in Silicon Valley who helped bring investors together with entrepreneurs. Realizing the huge value he was creating for his clients and for his company, Quattrone negotiated a special deal with his employer to cut himself in on a large percentage of that value. It was Quattrone who helped fund Amazon.com and Cisco.

When the dotcom boom ended in early 2000, various investors and government regulators were looking around for people to blame. There were many people who deserved blame, not least of whom were the investors who seemed to have forgotten that the price of a stock is the present value of its future earnings stream. Companies with negative earnings should have been valued at very low numbers or even zero unless they had realistic prospects of positive earnings in the future. But many investors were looking for others to blame. One obvious target was Quattrone, who had, in 1999, his best year, earned about $100 million.

On December 4, 2000, Quattrone was an employee of Credit Suisse First Boston (CSFB). At 6:20 p.m. that day, Richard Char, CSFB's Global Head of Execution - Technology Group, sent an e-mail to Quattrone and other CFSB employees. Here's the relevant section:

"With the recent tumble in stock prices, and many deals now trading below issue price, I understand the securities litigation bar is mounting an all out assault on broken tech IPOs. In the spirit of the end of the year (and the slow down in corporate finance work) you may want to send around a memo to all corporate finance bankers . . . reminding them of the CSFB document retention policy and suggesting that before they leave for the holidays, they should catch up on file cleanup. Today, it's administrative housekeeping. In January, it could be improper destruction of evidence."

Three minutes later, Quattrone replied, "You shouldn't make jokes like that on email!"

Another person who received Char's email (the head of West Coast Corporate Finance) suggested to Char that Char send an email under Char's name, the head's name, and the name of another senior officer. So at 8:13 p.m. that night, Char did so. Char's email stated:

"With the recent tumble in stock prices, and many deals now trading below issue price, I understand the securities litigation bar is expected to [sic] an all out assault on broken tech IPOs.

"In the spirit of the end of the year (and the slow down in corporate finance work), we want to reminding [sic] you of the CSFB document retention policy. The full policy can be found at [this intranet site]. The relevant text is:

"'For any securities offering, the Designated Member [of the deal team] should create a transaction file consisting of [items (i) through (v)].'

"So what does this mean? Generally speaking, if it is not (i) - (v), it should not be left in the file following completion of the transaction. That means no notes, no drafts, no valuation analysis, no copies of the roadshow, no markups, no selling memos, no IBC or EVC memos, no internal memos.

"Note that if a lawsuit is instituted, our normal document retention policy is suspended and any cleaning of files is prohibited under the CSFB guidelines (since it constitutes the destruction of evidence). We strongly suggest that before you leave for the holidays you should catch up on file cleaning."

Let's follow the moving parts here. Char, at the request of someone other than Quattrone, clarified his earlier email. He made clear that he was simply reminding people of the importance of following company policy and that company policy including suspending document retention policy if any lawsuit was instituted. So it appears that Char did nothing wrong, and so far Quattrone did nothing at all.

The next day, December 5, Quattrone sent an email to all recipients of Char's later email. Quattrone's email stated, "Having been a key witness in a securities litigation case in south texas (miniscribe) I strongly advise you to follow these procedures" and attached Char's later email. In other words Quattrone was seconding Char's advice to destroy emails before they could become evidence in a suit.

It was this email, along with his earlier email about joking, that led to Quattrone's being accused of obstruction of justice and witness tampering.

Quattrone's first trial ended in a hung jury in October 2003. His second trial ended with his conviction in May 2004. A federal appeals court overturned this conviction in March 2006. Those who want more details up to and including the May 2004 conviction should read Roger Donway's masterful piece of investigative reporting, "The Case for Frank Quattrone," Navigator, July/August 2004. Earlier this month, the prosecutor declined to try a third time. Quattrone is free.

Victory for Justice

Why was this a victory for justice? Because the prosecutor never made a good case against Quattrone. The prosecutor's argument was that Quattrone knew earlier than December 4 that he was under investigation for committing financial crimes and that he advocated destroying evidence that might have helped convict him. But all he did on December 4 was advocate people not tell jokes about serious things. Period. If you look at how we're treated in TSA lines at airports, you would think Quattrone would be a hero to the feds and to the media. In the TSA lines, jokes about the serious matter of hijacking can get you handcuffed. How someone can be accused of committing a crime for advising his colleagues not to make jokes about crime is beyond me.

It's true that on December 5, Quattrone did go beyond counseling against jokes and supported his colleague Richard Char's reminder about destroying emails. But even here all Quattrone was doing was reminding his colleagues about the potentially serious implications of not following the company's standard procedure. What he advocated doing was not clearly illegal. To see why, consider the email discussion that had occurred on December 3 between Quattrone and CSFB's general counsel, David Brodsky.

Brodsky to Quattrone: "As you may know, there's been an inquiry going on by both the SEC and NASD into our allocation process in the IPO market."

Quattrone to Brodsky (paraphrased): Email me some details of your concerns.

Brodsky to Quattrone: "Briefly, and this should absolutely not be passed on to anyone else, we have received Federal Grand Jury subpoenas asking for testimony and documents about the IPO allocation process from the firm."

Quattrone to Brodsky: "Are the regulators accusing us of criminal activity?"

Brodsky to Quattrone: "They are not formally accusing us or individuals yet, but they are investigating because they think something bad happened. They are completely wrong but merely being investigated and having something leak could be quite harmful, so the idea is to get them to back off their inquiry, we educate them as to the entire IPO process, including the allocation issues and criteria and urge them to back off."

Just three minutes later, Brodsky wrote another email to Quattrone: "But please do not under any circumstances discuss these facts with anyone—however innocently—because everything we say now is going to come under a microscope. I know these people and how they work and I am controlling the flow of information on an extremely tight need to know basis."

Again, let's follow the moving parts. Quattrone asked if the regulators were accusing "us" of a crime. Brodsky, the company's chief lawyer, answered that they weren't. That's relevant to the document retention policy; Brodsky's answer suggests that there's no reason not to destroy documents. Moreover, Brodsky assures Quattrone that he, Brodsky, can explain to the feds what goes on within the firm so that the feds will back off. Finally, Brodsky tells Quattrone not to discuss the case with anyone. So if Quattrone suddenly told people not to follow the usual document destruction policy, this would be tantamount to discussing the case.

As Roger Donway wrote in 2004:

"From this, I conclude that Quattrone did not know that the inquiry about which Brodsky had informed him required suspension of the company's document-retention policy. How could it, if Brodsky (who Quattrone surely assumed would know what he is doing) had not told many people about the investigation and had ordered Quattrone not to tell them? Not only was Brodsky not telling Quattrone to suspend CSFB's document-retention policy (which Quattrone must have assumed he would do if it were required), Brodsky had actually issued a gag order that made it practically impossible for Quattrone to order the policy suspended."

Now it turns out that CSFB should have suspended its policy on document retention. CFSB's very own policy was more nuanced than Quattrone or Char understood. It stated: "No document may be destroyed if (i) CSFB has been made a party to litigation involving such transaction or has received a subpoena which calls for the production of such documents or (ii) it is reasonably likely that litigation may be commenced in connection with such transaction of any matter relating to CSFB's involvement therein." The problem is that Brodsky had told Quattrone that subpoenas had been issued. This required suspension of the standard document-retention policy. But was it Quattrone's responsibility to suspend this policy? It's hard to see why.

Moreover, to establish that a crime is committed, a prosecutor must establish criminal intent. Did Quattrone mean to frustrate the SEC's investigation? It seems unlikely. Otherwise, why would he have been so careful to ask if there were criminal charges? Quattrone's emphasis, given the litigiousness in the Silicon Valley, seemed to be on avoiding civil suits.

Finally, if Quattrone was really trying to obstruct justice, he was the laziest obstructer of justice I've ever heard of. After all, he did not originate the memo that reminded employees of the document-retention policy. You might argue that he had a previous private conversation in which he asked Char to send such a memo. But this is a stretch. Moreover, if he had had such a conversation, then would he have castigated Char publicly for misplaced humor rather than doing so privately? And if he really wanted Char to look like the initiator, wouldn't he have wordsmithed Char's email in advance so that it didn't make jokes about such serious things? This all reminds me of what one of my doctor used to say when I would get afraid that some pain in my chest was a sign of a heart attack rather than gas pains: "When you hear hoofs, think horses, not zebras." This is the modern doctor's version of Occam's Razor: the simplest explanation is likely to be the right one. And the simplest explanation is that Char was doing what we saw as his job, with no heads-up (and the prosecutor never even claimed one) about a subpoena and that Quattrone was exercising prudence in destroying documents that devious litigants might later want.

No Victory for the Media

Consider how Quattrone's hometown newspaper, the San Jose Mercury News, reported the recent news that the prosecutor had declined to prosecute Quattrone a third time. Here's the first paragraph from a news story, "Analysis: Quattrone's Amazing Escape," (August 23, 2006) by the Mercury's Scott Duke Harris:

"It's taken 3 1/2 years, but Frank Quattrone has extricated himself from both regulatory shackles and a criminal conviction that once seemed likely to end to his brilliant if controversial career in disgrace. Houdini would have been impressed."

Houdini would have been impressed? Houdini extricated himself from amazing situations -- being tied up in a box and then dropped underneath the water, for example. Quattrone, by contrast, simply asserted his innocence and stuck with it. How does that make him like Houdini? There is only one interpretation I can think of, and Harris is vague about whether he meant this interpretation: namely, that once the feds target a businessman, no matter how innocent he is, and put lots of resources into prosecuting him, he will be convicted. If that's what he meant, the rest of article didn't clearly show it.

Or how about the Wall Street Journal, which used to advertise itself as "the daily diary of the American dream?" The editorial page, on which analysis of so-called financial crimes is about the best in the business, had an excellent, if brief, editorial celebrating the outcome. (See "Quattrone Walks," Wall Street Journal, August 23.) But that same day's front-page story, "Quattrone Deal Drops All Charges, Allows His Return to Wall Street," the one that a much higher percentage of readers is likely to read, though factually correct, subtly undercut Quattrone. The first sentence begins, "Frank Quattrone, the one-time investment-banking kingpin of Silicon Valley." Note the use of the work "kingpin." Does that sound familiar? Where else have you seen it? Whenever a major dealer in illegal drugs is caught. Do you ever see Senator Ted Kennedy referred to as a political "kingpin?" The choice of language shows the subtle anti-business bias of the reporters.

Wouldn't it be nice if the reporters could be as fair-minded toward businessmen pursuing profit as they are toward people charged with murder?

David R. Henderson, a research fellow with the Hoover Institution and an economics professor at the Naval Postgraduate School in Monterey, Calif., is author of The Joy of Freedom: An Economist's Odyssey and co-author of Making Great Decisions in Business and Life (Chicago Park Press, 2006).

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53 Comments

Good article - same issues apply to Milken?
While I am certainly envious of Quattrone's pay, based on the info I always thought he was getting a raw deal by being prosecuted.

My reading of the info surrounding Michael Milken leads me to think that he got screwed when he was coerced into pleading guilty to technical paperwork violations.

getting off
There are newspapers in Queens (part of New York City) what have similar editorials whenever a Gotti gets off.

We should not throw people who cannot be convicted in jail, but we should understand that somebody committed stock fraud and do everything possible to make it harder in the future. Convicting Ken Lay did not give retirees their pensions back but better regulation might have kept them from being stolen in the first place.

Ken Lay
Didn't retirees have the right to invest with Ken Lay and Enron? Were those pensions really "stolen" outright, and doesn't Sarbanes-Oxley legislation just muddy the waters and dampen the spirit of the free market place? Please LiberalGoodman explain what is a "safe" investment other than, of course, reading your milquetoast apologetics for the National Democratic Party.

Financial Press
It is absolutely clear from this and other reporting that the financial press has a clear bias against business. If it is possible to get a "dig" in against a company, the press will not hesitate - even if the dig is unrelated to the story at hand.

Anything for a headline
While the press would sell its gradmother for a headline it also takes corrupt government prosecutors seeking to make a name to bring charges where a conviction is unlikely and even laughable. Although people win it is the press that destroys their reputation (blood sells) and costs people their life savings.

The media should not be allowed to report on a trail until a decesion has been reached. The rights of an individual should always trump those of the press.

Sarbanes Oxley
Having spent a most unpleasant year with a "big 4" firm, I can tell you the SOX "404" audit is a colossal excercise in box checking, but the big 4 LOVED it, since they made more money after SOX.

SOX is causing a lot of companies to "go dark", that is stay private or delist.

Don't forget Lay wasn't convicted of SOX violations, so the system works. There will always be crooks.

On the other hand, most crooks become legislators-no legal jeopardy involved with stealing if you call it a tax and you'll make plenty of adoring friends like LG.

Regulators were asleep or worse.....
Let's also remember that the regulators (Arthur Andersen and the SEC--in fact Arthur Andersen was complicit and the SEC forced mark-to-market acctg on the world) weren't the ones who caught Enron. It was investors who smelled a rat and began shorting the stock thereby bringing this house of cards down.

"The press" has no special rights
They have the same right to write about an arrest or report on trial as an individual has to talk about an arrest with a friend, or to attend a trial.

Places where arrests are state secrets and trials are closed to citizens are not places I'd like to live.

ZZZZZZZZZZZZZZZ
Why can't the press televise a trial moron boy?

Save the insults, and if you want to go to sleep, do so & save all our time
They sometimes can: it depends on the judge. And some judges sometimes decide to close trials: that's their perogative, though they have to give reasons, and the reason has to survive challenges.

But arrest records are public information, courthouses are public places, and people (not just "the press") traditionally can and do attend trials, and can talk about what they see.

ps - "moron boy" doesn't add to your argument.

Eric the leeming spams more than a Nigerian with a special offer
Eric the love guru tells you hiws scertes of courtesy and manners for only 29.98. For 33.98 he'll also stop spaming you!

Ignorance on display-sure trials can be broadcast!
What an idiot. The rule is that trials are not open to the public who told you otherwise and where can we go to see what you base your idiot and moronic premise on?

TJ, what are you going on about??
I was talking about the media, and their role and rights. If you disagree, surely you can make an argument instead of just making noise.

The sixth amendment seems to contradict what you say.
This is how it begins:

"In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial..."

Note the word "public trial" in that sentence.

I don't think this means that "The rule is that trials are not open to the public," which is what you write.

>who told you otherwise and where can we go to see what you base your idiot and moronic premise on?

I suggest you consult the sixth amendment to the Constitution.

Do you know what a dictionary is ?
Manifrestly you have never served on a jury nor are familiar with the 6th amendment. Can you please explain how the 6th amendment would serve to prohibit publicly broadcast trials?

Or did you learn about the Constitution from listening to Janet Reno or Justice Souter?

For once you are right, I thought it was one of your usual spams
--

It wasn't me who said that trials could be secret
I said that in fact, trials were public could be and in fact sometimes were broadcast if the judge decided it would serve the interest of justice.

You disagreed. What you said was this

>The rule is that trials are not open to the public who told you otherwise and where can we go to see what you base your idiot and moronic premise on.

When I noted that it was the 6th Amendment who told me otherwise, you suddenly turn around 180 degrees and claim that I'm the one that thinks trials aren't public:

>Can you please explain how the 6th amendment would serve to prohibit publicly broadcast trials?

As noted, I never claimed anything like this. But you did. Why not back up and explain how the 6th amendment supports what you said about trials:

"The rule is that trials are not open to the public who told you otherwise and where can we go to see what you base your idiot and moronic premise on?"

to make this easy, here's how the 6th amendment begins:

"In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial..."

That is, the 6th amendment says the trials need to be public. But you say "The rule is that trials are not open to the public."

>Or did you learn about the Constitution from listening to Janet Reno or Justice Souter?

I learned about it by reading it. Can you tell us where you learned about it?

corrected headlilne: "It wasn't me who said trials should be secret."
Not could be: they can be. Should be - that was your formulation. Please back it up. By all means explain how the 6th amendment tells us this.

Furthermore: Here's your headline: "Ignorance on display-sure trials can be broadcast!"
But now, after being made aware of the 6th amendment you ask:

"Can you please explain how the 6th amendment would serve to prohibit publicly broadcast trials?"

First you say it is ignoratnt to say that trials can be broadcast, then (after hearing about the 6th amendment) you turn around 180 degress and say I was the one saying the constitution prohibited broadcasting trials.Nice try, but...

You are an idiot Eric, you don't even realize it when you're being mocked
You don't recognize when you're being mocked? You don't realize that despite what you said there are limits that prevent the broadcasting of every and any trial?

Truly you are a monument to the failure of the education system and the program of low expectations that it breeds.

What a clown.

Let me try to explain it in terms that you might understand
Go to the store and get a coloring book. See if it explains why you can't broadcast every and any trial despite the 6th-because a public trila has nothing to do with the media broadcasting it.


Now Maybe you can grasp it? If not write any angry letter to the Supreme Court and explain your concerns about everyone now having a public trial.

You cretinous blob of protoplasm.

Let me try to explain it in terms that you might understand
Go to the store and get a coloring book. See if it explains why you can't broadcast every and any trial despite the 6th-because a public trila has nothing to do with the media broadcasting it.


Now Maybe you can grasp it? If not write any angry letter to the Supreme Court and explain your concerns about everyone now having a public trial.

You cretinous blob of protoplasm.

I do realize you've had a lobotomy and your IQ is on the level with broccoli
Try and re read the comments and see if can grasp what was said. Its sad when you demonstrate your ignorance so publically.

Your namecalling doesn't change the bottom line
Which is this:

ThomasJackson: "“The rule is that trials are not open to the public"r idiot

US Constitution: "In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial..."

That is what was said. But you can't live with being wrong.

Shameless misrepresentation: I never said there was a requirement or necessity to "broadcast every a
And I never said or implied it did.

here's your contradiction:

“The rule is that trials are not open to the public who told you otherwise and where can we go to see what you base your idiot and moronic premise on?

"In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial..."

Why don't you write a letter to the Supreme Court & explain why the premise of a public trial is "moronic"

You make a mockery of the idea of debate, and your namecalling means you have no case
You were as wrong as someone can be. Let's review:

Jackson: “The rule is that trials are not open to the public who told you otherwise and where can we go to see what you base your idiot and moronic premise on?

The Constitution"In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial..."

Rather than admit you were utterly wrong, you seize on a totally specious issue, and totally misrepresent what I said. I never said that 'every and any" trial could or should be broadcast. I just noted that at the judges discretion, some could be. OJ Simpson's was, for example.

You frantic namecalling is the sign that you have no argument

ThomasJackson destroys another TCSDaily topic with a barrage of namecalling
And nobody says a word.

O.J. Simpson
TJ, Perhaps you think there's some kind of general law against televising trials. There is not. A network, Court TV, grew up around finding trials to televise. O.J. Simplson's trial was telecast live nationally. Of course not all trials are telecast, but that doesn't mean none can be.

Why not discuss the issue rationally instead of using it (and any and every other topic) as an excuse to lflood the discussion with personal attacks and silly insults?

LG you are hilarious - equating killing people with an email on document retention
LG, thanks for the laugh via your post. I now realize that you write parody, cause you just can't be that morally bankrupt to equate mobsters who kill to an investment banker who sent an email on a corporate document retention policy.

No Subject
You're both cretins. How's that for a word.

Which of course
Raises a point. SOX was passed in the blink of an eye, in terms of legislative timeframes. It took 12 years to pass ERISA after the failure of studebaker but just months after Enron, et al, here was SOX ready to go.

So. Are we to believe our legislators are so brilliant they can propose, debate and enact legislation in the blink of an eye?

Was SOX passed without adequate debate?

Were legislators failing to pass "necessary reforms" and allowing Enron to happen, e.g. were they negligent?

I find it funny that when the halls of bureacracy suddenly have all the answers, nobody raises a question

crimes
LG belongs to the class of leftist who believes that the greatest crime in the world, is making more than they (the leftist in question that is) does.

was only televized because judge Ito decided to allow it.
Had he decided to keep the cameras out, they would have had to stay out.

Funny how eric ignores his barrages of namecalling
funny, but not unusual

D'uh
My point was not that "every and any" trial needed or could be broadcast. My point was no law prohibits doing this, as the Simpson trial illustrated.

What names have I called ThomasJackson in this topic?
Fill it in: you can see what he's called me. What personal insults have I offered.

Nobody says a word ...
... Lemuel, because they are either too ashamed to be associated with Wacko or they see him as a useful idiot, always on call with some juvenile invective to move away from the issue up for debate.
We've all been there, fella.

Eric the leeming spams more than a Nigerian with a special offer
No wonder the readers think you're nuts Eric.

Res ipsa loquitur
---

Res ipsa loquitur
----

Res ipsa loquitur
----

Stick a fork in yourself, TJ, you're done
Still totally unable to post on topic, make an argument, or do anything but name call.

Eric the Leeming, insane and loving it!
No Eric you're the love guru the Master of Manners. No one here throws more filth than 10% of your total.

SOX is bad law
and is hurting the capital markets (especially small companies). The costs for small companies from Sox is nearly equal to very large ones.

They didn't "allow" Enron to happen. Arthur Andersen was hired to audit their books and was corrupt. Who watches the watchers??

Leeming's like Jack the Ripper saying there is a mad man out there
Just vomiting insults and venon with every spam.

What a moron
Try looking up the definition of moron Leeming and tell us why you aren't one.

One wonders how Eric qualifies his endless streams of filth
There not insults there sweet little love notes from the master of manners. The only thing that exceeds his ignorance his his ability to spray spittle and vomit in all directions.

No wonder LG hates the world
Guess the only one he must earn more than is Eric.

Wow its okay to broadcast all trials
Get lets inform the Suypreme Court today! They walk among us. It really is scary.

So there we have it: TJ determined to have the last word, repetitvely posting abusive nonsense
Really, really enlightening, right?

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