The National Association of Securities Dealers (NASD), a market regulator, has dropped civil charges against former technology investment banker Frank Quattrone. The NASD had accused him of improperly awarding shares in initial public offerings. It appears that all of the charges leveled against Quattrone were baseless and that he was being scapegoated for the collapse of the internet bubble.
Previously, the SEC overturned Quattrone’s lifetime ban from the securities industry. Also, a federal appeals court overturned his 2004 conviction for obstruction of justice, finding that the prosecution failed to show intent to obstruct an investigation. Although Quattrone was never charged with an underlying crime, the government claimed he was criminally guilty of “obstructing” its efforts to discover one.
Now, prosecutors are considering whether to try Quattrone criminally a third time (!) in order to punish him for spinning IPOs. This is the practice of allocating shares in risky new companies to preferred clients. Laws against spinning were stiffened after the Internet bubble collapsed, and the government appears adamant about punishing Quattrone for not predicting what kinds of legal actions would become illegal at a future date.Frank Quattrone Gets Last NASD Allegation Dropped
June 1 (Bloomberg) — Frank Quattrone, the former Credit Suisse Group technology banker, said the NASD dropped its case accusing him of improperly awarding shares in initial public offerings during the Internet boom.
The victory means Quattrone has prevailed in all three cases brought by NASD after the securities industry regulator dismissed the allegations yesterday, Quattrone said today in a statement. Federal prosecutors are deciding whether to try him for a third time after an appeals court in March threw out his conviction on obstruction-of-justice charges.
“We’ve seen an extraordinary collapse of the government’s case against Frank Quattrone,” said Robert Mintz, a former federal prosecutor and now a partner at McCarter & English in Newark, New Jersey. “You have to believe the government is now wringing its hands, trying to decide whether or not to retry him for a third time under these circumstances.”
The end of the NASD cases eliminates the remaining legal barrier for a return to the securities industry by Quattrone, who was paid $120 million in 2000 as the top banker promoting Internet stocks. Quattrone, who took companies including Amazon.com Inc. public, was accused of playing favorites when awarding shares of the hottest IPOs, and then encouraging employees to discard documents linked to the deals.
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Key Witnesses
NASD said that because many key witnesses have left the securities business since the allegations were first filed in 2004, it no longer has the power to compel their testimony. It “would make no sense to move ahead with this case under current circumstances,” NASD hearing officer David M. FitzGerald wrote in his order granting the dismissal.
NASD spokeswoman Nancy Condon said the regulator had no comment.
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SEC Overrules NASD
Two months ago, in one of the NASD cases, the U.S. Securities and Exchange Commission threw out Quattrone’s lifetime ban from the securities industry. It said NASD had violated its own rules in imposing the penalty after Quattrone declined to testify in a hearing about the matter.
Quattrone’s lawyers are negotiating with federal prosecutors in a bid to head off a third criminal trial. The conviction that was overturned in March came after his first trial ended in a hung jury.
Heather Tasker, a spokeswoman for U.S. Attorney Michael Garcia in Manhattan, said there has been “no change in the status of the case.” She declined to comment on when prosecutors will disclose their plans.
“This is an important victory for Quattrone, but he’s not out of the woods yet,” said Tim Coleman, co-chair of Dewey Ballantine’s white collar crime and government investigations practice. “This may increase the pressure on the government to fight for a conviction to avoid the perception that Quattrone is getting off scot-free,” said Coleman, who recently left the U.S. Attorney General’s office.
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Hi there,
Didn’t I read in some pamphlet or another how it was not so good to make laws to punish actions that occurred in the past?
Oh yeah – here;
US Constitution, Article 1, Section 9;
“No bill of attainder or ex post facto Law shall be passed.”
Vince, you are right; any further prosecution of Quattrone would have to rely on laws in place at the time of his actions. But the government can always take several bites at the apple if it alleges a different legal basis for the prosecution.
One point being missed here is that although Quattrone’s actions may have been legal, they were a form of theft developed by underwriters that allowed them not to pay to issuing companies full value for the shares being sold at the IPO. This “free money” was distributed by the underwriters like bribes to friends at other companies, on the premise that these friends would similarly bring business from their firms to that securities firm.
The markets are changing and some new issuers like Google are making use of Dutch auctions to capture the full value of their IPOs.
Regards,
Tom
Did the IPO allocation law really come along later, or was it just “stiffened” someehow, as the blog post rather vaguely mentions…?
Artisan,
The NASD banned spinning in 2002, after Quattrone was charged with his alleged crimes. See http://www.nasd.com/PressRoom/NewsReleases/2002NewsReleases/NASDW_002921.
Wow, thanks J Henderson. That was quick and very accurate.
Tokyo Tom, while you may be very well right, the NASD paper doesn’t say, and I don’t understand though how spinning makes the IPO price lower (or a theft?).
Artisan:
Maybe this may be useful as further background: http://moneycentral.msn.com/content/P89192.asp?GT1=4529.
Strictly speaking, I don’t think that anything Quattrone did was illegal – companies going IPO could have chosen to go Dutch like Google and to leave less cash on the table for the underwriters to spin. The receiving end of spinning was just as bad – individuals pocketed cash privately by getting a piece of an underpriced IPO in exchange for an implicit understanding that they would bring their firm’s IPO to the same underwriter. Thus the receivers profitted while giving their companies (and other owners) a raw deal.
Regards,
Tom
Artisan, ol’ bro, what happened to your spirit of inquiry? )
try:http://www.wrhambrecht.net/ind/strategy/bill_pov/200401/index.html
and:http://www.google.com/search?hl=en&lr=&safe=off&q=William+Hambrecht%2B+Dutch+Auctions
TT seems to GOOG IPO was the benchmark of benchmarks. I’d like to hear him explain why GOOG’s original offering price was slashed from the 120 range to 85…
Artisan, remember: “There aren’t serious Questions that need Answering, There are Serious Answers that need Questioning.”
To your Q: The practice of an investment bank setting aside portions of a corporation’s Initial Public Offering for senior management of that corporation.
From:http://financial-dictionary.thefreedictionary.com/Initial%20Public%20Offering%20Spinning
Spinning, placing shares into “non-investment interested” hands, acts to reduce demand and increase potential supply of said-same shares( in the aftermarket ). With that, and other reasons, the Underwriter is incentivized to lower the price of all shares in the transaction…
Thanks for the links again! This answers my question and some others too indeed.
I always sensed that’s the way it was done but I didn’t realize completely who was the big “looser”.
Now Tokyo Tom may say Quattrone didn’t do anything illegal, and yet Credit Suisse still decided to part from him….
I know some sort of ethical rules exist in most financial institutions today… spinning or not, but I don’t know their historical background. They are stipulated in the business contract tying the company to its customers too, I believe.
Can you say that Quattrone was neglecting the interest of his customers in this sense? His IPO mission is certainly a balance between two poles to start with though, as it is to sell the stocks high and meanwhile to publicize their growth potential … , but he should feel the ethical conflict just like a lawyer cannot defend two opposed parties.
No schizophrenic Quattrone should have accepted to do an IPO when his investment banking side precisely makes a profit out of the failure of the IPO valuation side.
I find he would be liable to pay some financial compensation to the IPO business for breaking that ethical rule of the contract I guess (IF that rule existed). Prison would be perhaps somewhat exaggerated…but…can you deny a top executive, being directly interested in the success of his Employing company through stock options etc… engages in unethical behaviour for personal profit? That would be theft, wouldn’t it?
Artisan, I believe it is possible to view what Quattrone did as unethical, but only in a bull market when it looks like everything is going up. When the IPO shares did well during the bubble, it looked as if he was handing out free money. If you view spinning over the course of an entire boom and bust cycle, you realize that Quattrone’s buddies could have just as easily lost alot of money by buying into an IPO. Then is it unethical? It is not exactly clear who is harmed by this practice. I think it should be up to Credit Suisse to decide if spinning is an acceptable business practice and to terminate those who violate the company policy.
I’m not completely convinced you’re right J. Henderson. Certainly I don’t say bankers can forecast the future bust cycle perfectly, but they are minimizing the risks a lot and as I remember, they whispered (not proven though!) Quattrone kept publicizing outside how great new market economy was, long after he warned his staff internally it was all over.
Where you are making a brilliant analysis I feel though, is when you imply the bull market atmosphere is a key to understanding what happened. There’s much to bet that investment banking was a bigger deal and was over valuated at that time even compared to the other business branches at Credit Suisse too. This priority helped make the ethical conflict invisible.
Credit Suisse has seen lots of scandals of course, but it is probably quite important for the bank to show a good will to fight “evil” let alone because of the international community of governments arguing against swiss bank secret. Besides, as a libertarian, I want to believe there is an incentive for a business to act ethically, even though that can’t be proven either!
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