Securities regulators charged former star technology banker Frank Quattrone on Thursday with undermining analyst objectivity and favoring certain clients by giving them access to lucrative initial public offering shares.
In a separate complaint, the National Association of Securities Dealers also charged the former Credit Suisse First Boston banker with failing to cooperate with its investigation into whether he encouraged his staff to destroy documents after he was notified of ongoing federal probes.
Quattrone, who resigned from CSFB under a cloud of investigations this week, wielded tremendous influence during the dot-com boom when he served as head of the bank’s technology unit, shepherding companies like Amazon.com and Netscape Communications into the market.
The NASD, which informed Quattrone in January that he faced the civil charges, said in a statement that the banker “created and oversaw a flawed organizational structure that undermined research analyst objectivity.”
The NASD also charged Quattrone with distributing IPO shares to Silicon Valley executives so-called “Friends of Frank” – whose companies did investment-banking business with CSFB. The practice, known as “spinning,” was recently outlawed by federal regulators.
Quattrone’s attorney, Howard E. Heiss, called the NASD charges “an unprecedented attempt to take punitive action against an individual for conduct that was legal at the time and widespread throughout the industry.”
The latest NASD complaint comes after Quattrone failed to testify before the agency last week, apparently on the advice of his lawyer, about whether he told his staff to discard material during an ongoing investigation. He’s also being eyed by the Manhattan U.S. attorney’s office and New York Attorney General Eliot Spitzer for possible obstruction of justice charges.
Quattrone held an unusual amount of power at CSFB during the tech bubble, overseeing a staff that included the bankers who generated some of the era’s biggest deals as well as the analysts who researched the companies involved. CSFB removed the analysts from his supervision in the summer of 2001.
The NASD and the Securities and Exchange Commission began taking a closer look at Quattrone’s activities in May 2000, specifically IPO pricing and analyst conflict of interest.
“Recent investigations into conflicts of interest on Wall Street have shown that in too many cases in the past, investors’ interests were compromised for greater investment banking revenues,” Mary L. Schapiro, NASD’s vice chairman and president of regulatory policy operations, said Thursday as the charges were announced.
When Quattrone joined CSFB in 1998, he was already an established investment-banking star. He brought dozens of colleagues and associates with him, essentially creating what the NASD called “a firm-within-a-firm,” with all aboard reporting to him.
Within a year, CSFB managed more U.S. IPOs than any other firm, and by 2000, investment banking generated $3.68 billion, a 60 percent increase over the year before. Quattrone himself earned more than $200 million between August of 1998 and the end of 2001, the agency said.
To win and retain investment banking clients, the tech group gave access to hot IPO shares to select corporate executives who could influence their employers’ choice of investment bankers, the NASD said.
The shares were allocated to individuals and flipped back to CSFB in aftermarket trading, the NASD said, producing substantial profits. The NASD considers this to be tantamount to cash gifts – a violation of the agency’s rules.
Quattrone also created a powerful incentive for analysts to initiate and maintain positive coverage on investment banking clients by linking their compensation to investment banking revenue, the agency said. Investment bankers were also encouraged to participate in analysts’ performance evaluations.
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