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High-Flying Financier On Way Down

Fraud Investigation of Palo Alto Banker

Feb 9, 2003 | San Francisco Chronicle Three years ago, when investment banker Frank Quattrone learned that his rivals at Lehman Brothers had won the deal to take El Sitio Inc. public, he refused to concede defeat.

The Argentinian Web portal had lost $11.4 million the year before, but its initial public offering would mean millions of dollars in fees for the lead underwriter, and Quattrone coveted the deal.

So he hired away the entire Lehman team.

Such acts of startling ambition were the mark of Quattrone's five-year reign at Credit Suisse First Boston's Palo Alto outpost. As head of the bank's technology group, he amassed a virtual empire of investment bankers, company analysts and stockbrokers that drove Credit Suisse from perennial also-ran to the nation's No. 1 underwriter of technology stocks.

It was "an investment bank on steroids," recalls one former employee.

But Quattrone's deal-driven ego and unconventional methods, largely unquestioned during the 1990s Internet frenzy, attracted harsh scrutiny when the bottom fell out of the market.

Last week, Credit Suisse put its onetime star on paid administrative leave amid allegations that he urged subordinates to destroy documents potentially relevant to a federal investigation.

Two weeks ago, the NASD, formerly the National Association of Securities Dealers, announced its intention to sue him for violating its rules.

New York's attorney general is investigating Quattrone for possible fraud and unfair business practices, and federal prosecutors are considering criminal charges related to the alleged destruction of documents.

Although Quattrone has denied any wrongdoing, his colleagues at the pinnacle of high finance have already begun to wonder how one of the brightest bankers among them could have fallen so far, so fast.

A LIKABLE ANOMALY

In the world of investment banking, Quattrone, 47, of Los Altos Hills, is a bit of an anomaly. He is regarded by people who have worked for him as a brilliant financier, deal-driven and hugely competitive, with an unswerving devotion to the technology industry.

Former CSFB employees say he had a reputation for working incessantly; they received e-mails from him at all hours of the day and night.

He made at least $100 million in 1999, yet for all his successes, he displays few outward signs of material wealth. He owns houses in Los Altos Hills and Pebble Beach, but he also eschews suspenders and Hermes ties for golf shirts and chinos and drives a "beat-up old Jaguar convertible," said the former employees.

"He's likable, self-effacing," said one former employee, "not the obnoxious power broker you would expect."

Quattrone was born in South Philadelphia. He excelled at school from the outset, and in 1977 he graduated summa cum laude from the University of Pennsylvania.

In 1979, Quattrone joined the prestigious Wall Street investment bank Morgan Stanley. Two years later, he earned a master's of business administration from Stanford University, and he moved to Morgan Stanley's Palo Alto office in 1983.

The fledgling technology industry was a novelty for Wall Street firms back then, but Quattrone quickly recognized its potential. With the Morgan Stanley name behind him, Quattrone began to handle some of Silicon Valley's biggest and most lucrative deals.

In 1990, he led the initial public offering, or IPO, for Cisco Systems. In 1995, he handled the IPO for Netscape, whose huge, first-day run-up in stock price set the tone for tech-stock investing over the next five years.

But as Quattrone's successes grew, so did his desire to win. He developed a hard edge that sometimes offended the Silicon Valley residents with whom he did business.

In 1989, for example, he started work on a new house in Los Altos Hills. He hired for the job Gary Lencioni, a housing contractor who had built homes for then-San Francisco 49ers star Jerry Rice and other celebrities.

By 1994, Quattrone had filed at least four lawsuits in San Francisco and Santa Clara County superior courts, accusing Lencioni's company and 21 subcontractors, from the stonecutter to the plumber, of fraud and breach of contract. The cases quickly ended in a settlement that essentially covered the cost of Quattrone's house.

He was "a monster," said Lencioni, who refused to comment further.

Quattrone was also growing restless at work, chafing under the control of old-school bankers from New York. In 1995, he demanded for himself and his lieutenants an unprecedented deal: a percentage of the total underwriting fees and trading commissions from Morgan Stanley's technology transactions, as well as the right to oversee all technology-company analysts.

Morgan refused. So in 1996, Quattrone and top deputies Bill Brady and George Boutros left Morgan for Deutsche Bank, forming a firm within a firm called Deutsche Morgan Grenfell.

Quattrone got what he wanted from Deutsche, including a half share of all revenues from tech deals. His group continued its streak of high-profile successes, including a $500 million public offering for Intuit and the IPO of Amazon.com.

Corporate clients continued to marvel at his attention to detail. To pitch the Amazon deal, he brought documents bound to look like books that the online retailer might hawk on its Web site.

Yet in July 1998, Quattrone decamped again, this time for Credit Suisse. He brought Brady and Boutros with him, as well as 150 other employees.

ELEVATING THE FIRM

Credit Suisse was low in the tech-deal pecking order when Quattrone arrived.

In 1998, the bank was ninth in technology and telecommunications IPOs, with just 11 transactions and a 3.6 percent market share among underwriters.

But the following year, Quattrone pushed the bank into second place behind Goldman Sachs, with 87 deals and a 19.4 percent market share. Counting only technology IPOs, Credit Suisse was number one.

Quattrone's group was so busy that it sometimes handled four IPOs a week. On May 5, 1999, it closed the IPOs of Radio One Inc. and Latitude Communications Inc. in a single day.

The financial results appeared phenomenal. From 1998 through 2000, the stock of technology companies taken public by Credit Suisse rose an average of 75 percent from the offering price to the first trade, according to The Chronicle's analysis of data from Thomson Financial.

Yet some of the deals raised serious questions. In an e-mail obtained by regulators last fall, a Credit Suisse analyst was quoted as telling European investment clients that most of his IPOs "never should have gone public" because they involved companies with a slim chance of survival.

"We were shoving as much s-- through the pipeline as possible," said a former Credit Suisse employee. "They knew they were pieces of s--, but Frank had enough of a reputation to not only do the bad deals, but the marquee deals as well."

An analysis of financial data shows that technology shares offered from 1998 to 2000 through Credit Suisse IPOs have dropped an average of 48 percent in value. Of 156 technology and telecom companies that the bank took public over that period, the stock of 60 trade at less than $1. Eight such companies are bankrupt.

But a Credit Suisse spokeswoman defends the bank's record, saying, "We maintain high standards on the quality of the issues we brought public no different than the other top firms in the industry."

PERSONAL FORTUNES

Quattrone and his associates, meanwhile, reaped personal fortunes from some of the transactions.

Quattrone's arrangement with Credit Suisse allowed him to invest $25 million a year for the bank in companies the firm hoped to bring public, according to regulatory filings. The investments were handled through a partnership called QBB Management, of which Quattrone, Brady and Boutros were the general partners. The partnership permitted the individuals to put their own money in the same deals the fund invested in.

As a result, the executives were able to buy stock at a price unavailable to even choice clients.

For example, Quattrone and his colleagues paid $6.75 a share for Riverdeep Group before Credit Suisse took the Irish maker of educational software public in March 2000, according to regulatory filings. The IPO price was $20 a share for the company's shares.

Within three months of the IPO, filings show, the Credit Suisse executives sold more than $4 million worth of shares, nearly doubling their investment. Last month, the company agreed to sell itself to management for less than $2 a share.

Though not illegal, or even unique among investment banks, those and other practices drew criticism after the stock market began to sink in March 2000.

But investors also complained that Credit Suisse salesmen had forced them to pay kickbacks in exchange for hot IPO shares. The bank fired two salesmen in its San Francisco office in mid-2001 and paid a $100 million fine to settle a Securities and Exchange Commission investigation.

One of the fired salesman, John Schmidt, filed a lawsuit against Credit Suisse and Quattrone, saying bank executives in New York had conceived the kickback plan, and that Quattrone had helped make Schmidt the scapegoat. The firm said the allegations were without merit. The case is still pending.

But a growing chorus of critics began to question why analysts at investment banks had issued rosy predictions for tech firms only to see shares of the firms collapse. E-mails obtained by investigators soon showed that, in some cases, the analysts had little faith in companies they recommended to investors.

In one e-mail, for example, a Credit Suisse analyst described the practice of issuing a "buy" rating for a stock while verbally warning clients not to buy it.

Regulators also began to investigate the firm's practice of allocating hot IPO shares to the personal accounts of corporate executives whom it was courting for investment banking business.

Through it all, Credit Suisse stuck by Quattrone, even as it hired new leadership to improve its image. The bank insisted that Quattrone was in good standing, promoting him to global head of technology banking and granting him a seat on the executive board.

Then came the e-mails that would turn the firm against him.

UNDER INVESTIGATION

On Dec. 3, 2000, one of Credit Suisse's lawyers informed Quattrone in an e- mail that the firm's IPO allocation practices were under investigation by the SEC, the NASD and a federal grand jury.

The following day, a Quattrone subordinate sent an e-mail to Credit Suisse's technology staff, recommending that they destroy documents involving their deals. The message cited the "recent tumble" in stock prices and warned that shareholder class-action lawyers would soon file lawsuits.

The next day, Quattrone replied with a brief message urging employees to follow the advice.

When Credit Suisse lawyers asked Quattrone if he was aware of the investigations when the e-mails were sent, his answer was no, according to sources.

But after the lawyers discovered the Dec. 3 e-mail, they moved swiftly to put Quattrone on administrative leave on Jan. 31.

Being placed on administrative leave may now be the least of Quattrone's worries.

He faces a series of legal problems, the most serious of which is a possible federal criminal charge for obstructing justice. Companies are generally allowed to destroy documents from time to time, unless a legal proceeding or investigation is pending and a company gets rid of documents to keep them from being discovered.

"It boils down to why you're doing it," explains defense attorney Tom Bienert, who served 11 years as a federal prosecutor in Los Angeles and Orange County.

Although Quattrone only urged others to "clean up" their files and, according to Credit Suisse, no files were actually destroyed, the law may still apply.

"If you corruptly attempt to interfere with the investigative process," says Bienert, "you can be prosecuted."

Complicating matters is an investigation by New York Attorney General Eliot Spitzer. Initially, Spitzer's office was looking at whether conflicts of interest involving analysts in Quattrone's group constituted fraud and unfair practices, offenses that could carry criminal penalties under New York law.

But Spitzer expanded the investigation into the possible document destruction and is battling federal prosecutors over who will lead the probe, according to the Wall Street Journal.

Two weeks ago, the NASD notified Quattrone of its intention to sue him for failing to supervise stock analysts and for funneling hot IPO shares to favored clients.

If the NASD wins its case, it could fine him, suspend him or bar him from the industry for life.

Meanwhile, the shareholders of Credit Suisse's onetime client El Sitio Inc. have not fared much better than Quattrone.

After Quattrone helped take the company public on Dec. 9, 1999, its shares more than doubled to $33.31. But on Oct. 30, 2000, the company merged into Claxson Interactive Group Inc. And at the close of business Friday, Claxson traded on the over-the-counter market at 24 cents a share.

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