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Top Valley Investment Banker Told He May Face Civil Charges

QUATTRONE TO ARGUE HIS CASE TO THE NASD

Feb 1, 2003 | mercury News Frank Quattrone, a top Silicon Valley investment banker who helped lead the boom in technology IPOs in the late 1990s, has been notified by an industry regulator that he may face civil charges for past banking practices.

As head of technology investment banking for Credit Suisse First Boston, Quattrone was for years one of the most sought-after bankers for tech companies looking to issue shares in an initial public stock offering. He has the right to argue his case to the regulator, the NASD, as to why charges shouldn't be filed, and he plans to do so soon, said people close to the matter.

News of the notice has fueled widespread speculation among his peers in the valley that Quattrone -- a 23-year banking veteran -- will leave the business before long.

The potential charges revolve in part around Quattrone's unusual former position as supervisor of both stock research analysts and investment bankers for Credit Suisse. Critics said the arrangement invited conflicts of interest, such as investment bankers pressuring research analysts to write reports that favored investment banking clients, at the expense of investors expecting objective reports.

The NASD also has found fault with Quattrone's role in allocating hot IPO shares to executives of companies Quattrone wanted as investment banking clients, said people close to the matter.

If the NASD eventually brings charges against Quattrone, it could assess penalties ranging from sanctions, fines, suspension from working in the securities business or, in the extreme, a ban from the industry.

Quattrone defended his past actions as ethical in a prepared statement Friday, saying he was ``confident the truth will prevail.'' He did not respond to a question about his future plans.

`Highest standards'

``Throughout my 23-year career in investment banking, I have upheld the highest standards of professional conduct,'' he said. In its own probe of the issues, ``CSFB has found no evidence of wrongdoing on my part,'' he said, adding that he will cooperate with any inquiry.

The action against Quattrone, reported Friday in the Wall Street Journal, is the latest in a massive crackdown against Wall Street firms for aggressive and sometimes unethical or even illegal behavior during the tech stock boom. In December, 10 firms including Credit Suisse agreed to pay $1.4 billion to settle charges that they misled investors by issuing tainted research on companies being solicited for investment banking business. Credit Suisse's share of the $1.4 billion ``global settlement'' was $200 million.

Regulators and the firms are still haggling over the language that will be used in the final settlement documents, with firms trying to limit the disclosure of damaging documents to avoid inviting private lawsuits.

According to people close to the Quattrone matter, NASD investigators are alleging violations on two fronts, each of which NASD believes should result in ``failure to supervise'' charges.

One NASD allegation, these people say, is that the past arrangement under which a team of Credit Suisse tech-stock researchers reported to Quattrone an investment banker was improper. For years until the practice was abolished in 2001, technology investment researchers reported jointly to Quattrone and to the head of research. The arrangement, unique on Wall Street, was widely criticized for motivating researchers to woo investment-banking clients by falsely hyping the clients' company stock to investors. Stock market researchers are supposed to provide investors with objective investing advice.

The other potential NASD charge centers on allegations that Quattrone exerted improper influence over how shares in hot technology IPOs were allocated. During the heady days when IPO shares were rising several hundred percent in the first days of trading, many investment banks found they could use pre-IPO shares as a perk to win favor with executives of companies whose business they were courting.

`Friends of Frank'

Documents released by regulators in past probes show that Quattrone's group was able to secure an unusually large percentage of Credit Suisse tech deals for favored executives. Their IPO accounts became known as ``Friends of Frank'' accounts.

Quattrone's role at Credit Suisse helped catapult the New York-based investment bank a unit of Switzerland's Credit Suisse Group to become one of the nation's leading underwriters of technology IPOs in 1999 and 2000. The firm led 125 tech deals in those years that raised $12 billion for the companies, according to Thomson Financial.

Some legal experts privately said they were puzzled as to what legal grounds NASD would use to sanction Quattrone on the IPO-allocation issue. The practice of awarding hot IPO shares to executives of client companies, known as ``spinning,'' has long been viewed as permissible, and NASD only late last year proposed outlawing the practice.

However this latest regulatory action plays out, several valley investment banking officials privately said they believe Quattrone is not long for the investment banking business. They noted that several elements that helped make his tech team into a powerhouse -- including having hot shares to dole out to executives and researchers under the eye of investment bankers -- will no longer be permitted once the IPO market heats back up again.

``If he gets this resolved in some way, he'll say `I'm declaring victory and going to live the second half of my life' '' doing something else, predicted one official.

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