what a fucking mess, #2

Joseph S Barrera III joe@barrera.org
Fri, 07 Mar 2003 20:17:50 -0800

I remember trying and failing to get in on Red Hat's IPO.
I could have made $40,000 in two days if I knew the right
people, or even if I had signed up with eTrade in time.

- Joe


Dan Gillmor on Technology
Quattrone clique disgraced Silicon Valley

By Dan Gillmor
Mercury News Technology Columnist

There's little shock value these days in new stories of shifty dealings 
by Wall Street insiders.

So disciplinary charges filed Thursday by the NASD (formerly known as 
the National Association of Securities Dealers) only amplified the 
notoriety of Frank Quattrone, the Silicon Valley investment banker who 
has come to personify the worst excesses of the technology-bubble days.

No one could have been amazed at the latest litany of how supposed 
``analysts'' at a Wall Street investment bank were part of a scheme to 
pump up stock prices as a quid pro quo for lucrative banking business. 
In this case, Quattrone's ``everyone was doing it'' defense rings true.

There was some eye-opening detail in NASD's description of Credit 
Suisse's practice of ``spinning'' initial-public-offering shares to 
``Friends of Frank'' -- executives of companies with which the firm 
wanted to do business. Spinning was a pervasive part of the operation 
that generated billions of dollars in fees.

But there's a deep sense of sadness today in seeing how many Silicon 
Valley ``friends'' Quattrone accumulated in his zeal to dominate 
technology investment banking. Thanks to my colleague Deborah Lohse, who 
obtained a list of some of these good buddies, we now can put many more 
names and faces on the valley's expanding hall of shame.

Keep in mind how this all worked. In the vast majority of cases, 
according to NASD and some of the recipients, the Friends of Frank 
didn't do the trading. They had ``discretionary'' brokerage accounts. 
They gave Credit Suisse brokers control over when to sell the insider 
shares they had received.

Like the analysts who praised junk companies, these brokers were better 
informed than the average member of the public. The brokers sold the 
insiders' shares regularly and usually for significant profits.

The Friends' risk was next to zero. They were being given what insiders 
called ``free money'' in the late 1990s. The free money came in big, big 
bags. And their companies did business with CSFB -- big business.

``Scandal'' is too small a word for this behavior.

Remember who lost in this spinning. First were the little investors who 
bought over-hyped stocks that have since crashed. Second were the 
companies selling stock; the huge gains their shares tended to make at 
the peak of the bubble meant that the investment bankers were pricing 
the offerings much too low. That meant less money in the coffers of 
small companies, some promising, that would eventually need every dime.

The other losers were the Friends' own companies -- or, to be more 
precise, their investors. If someone was going to make a payoff for 
investment-banking business, the money should have gone to the 
shareholders, who were truly picking up the bill for the banking fees.

Choosing an investment bank to handle a transaction -- IPO, secondary 
offering, merger, whatever -- is serious stuff. Some of the Friends 
would undoubtedly have picked CSFB to handle their companies' deals even 
in an arms-length environment.

Quattrone, who steadfastly denies any wrongdoing, is enormously 
talented, with great knowledge and unparalleled connections. He had a 
hard-working, brainy team. But the shareholders of these companies will 
never know if they might have gotten a better deal from a different bank.

The Friends of Frank disgraced Silicon Valley. And along with the other 
insiders who profited so handsomely at such cost to so many others, 
they've just about wrecked American capitalism.