It has been a torrid year for Frank Quattrone. Only 18 months ago he was the most successful internet deal maker in the US and one of the most powerful men on Wall Street. Now those days may be over - and not just because of the downturn in technology stocks.
The Securities and Exchange Commission is investigating the activities of Quattrone and his team at the Swiss-American banking giant, Credit Suisse First Boston in 1999 and early 2000. New internet companies were white-hot investments at the time, and bankers such as Quattrone allotted shares to institutional investors before they came to market.
If you were one of the lucky ones to be granted an allocation, you were almost guaranteed to see the value of your shares soar when they floated on the open market. For many such investors, millions were made in minutes. Now the US regulator wants to know what they may have given the banks in return.
Quattrone, 45, denies any wrongdoing, as does CSFB. So do many of New York banking's most august financial institutions, which have also been dragged into this unseemly controversy. Morgan Stanley, Goldman Sachs, Lehman Brothers - all have been served with subpoenas demanding information about their conduct as underwriters for technology companies that floated.
Further woes were piled on to these and other banks last week, when it emerged that the US Attorney-General's office had summoned a federal grand jury in New York to investigate further. Nobody knows when these inquiries - already nearly six months old - are likely to end, but criminal charges are possible. At CSFB, several of Quattrone's colleagues are also facing questions from the National Association of Securities Dealers.
Quattrone was poached from Deutsche Bank in 1998, and he took with him no fewer than 100 subordinates. His closely knit team is said to have generated $1 billion in revenue for CSFB. A CSFB insider said: 'Quattrone runs his own research, his own vertically organised mini-bank. Many of the technology analysts for the firm in New York and California answer to him.' Quattrone, who is based in Silicon Valley in California, seems to have enjoyed the trappings of his success. 'Frank's friends' would be treated to expensive dinners and regular skiing trips to fashionable Aspen in Colorado. At the same time, he was in a position to indulge his less conventional tastes for Seventies clothing and karaoke.
The shine was taken off such antics with the collapse of the technology market last year. The SEC entered the game last autumn, apparently acting on a tip-off from an aggrieved hedge fund. With a reported pay packet of up to $100m a year, of course, it's unlikely that Quattrone will ever really want for anything. But having been the golden boy of America's tech stocks boom, he and his fellow super-bankers are beginning to look mere shadows of their former selves. And other disconsolate champions of the new economy also have reason to worry. If allegations of under-the-counter deals between banks and institutional investors are proven, the institutions, too, will have to face the consequences. Questions will also be asked about how much the floating companies themselves knew.
Beyond that can be heard the distant stampede of litigious small investors, who will be quick to seek redress from the courts if it emerges that they have been the victims of market-rigging. Class action lawsuits have already been launched against CSFB, Goldmans, Merrill Lynch, Morgan Stanley, Salomon Smith Barney and others.
Ultimately, their success will depend on the outcome of the US authorities' inquiries. But the claims contained in their court submissions, which remain to be proven, make dramatic reading. Take, for example, one claim against CSFB being brought by small investors in connection with the December 1999 flotation of software distributor VA Linux Systems, on Nasdaq. Quattrone is not a defendant in this case and is not understood to have had personal involvement in the deal. But his employer was the lead underwriter at the offering, which at the time was the best-performing initial public offering of the decade. From a starting price of $30, the Linux shares closed at $233 after a single day's trading.
NV Linux itself and two of its executives, chief executive Larry Augustin and vice-president Todd Schull, are co-defendants. The plaintiffs say they are liable because it was their responsibility to ensure the truthfulness of the prospectus. But their most scathing allegations are reserved for CSFB. They say it 'engaged in a pattern of conduct to surreptitiously extract inflated commissions greater than those disclosed' in the prospectus, and accuse the bank of 'other acts of misconduct'.
The court submissions claim: 'Credit Suisse solicited and received additional, excessive and undisclosed commissions from certain investors, in exchange for which it allocated to those investors material portions of the restricted number of Linux shares issued in connection with the offering.' This, say the plaintiffs, was contrary to the terms set down in the flotation prospectus.
'In some cases,' they allege, 'the amount of the commissions was determined ex post facto by arrangements including specific formulas tied to investors' profits on the offering.' They claim this was done without other investors knowing.
The lawsuit accuses the bank of concocting illegal market-rigging schemes with some of the same customers, in which the clients would buy additional Linux shares after the stock had floated.
'Such tie-in arrangements,' it says, 'were designed to, and did, maintain, distort and/or inflate the market price for Linux shares in the aftermarket.'
It adds: 'Unbeknownst to investors who purchased in the aftermarket, the increase in share price was a result, in part, of the tie-in arrangements which locked in demand for Linux shares in the aftermarket at levels well above the offering price, thereby unlawfully and deceptively manipulating the market in Linux shares.'
The plaintiffs say this violated SEC regulations, and they accuse CSFB of breaking Nasdaq's rules of conduct.
In conclusion, they claim that the bank deceived the investing public, artificially inflated and maintained the market price of Linux shares, and caused ordinary shareholders to buy Linux stock at artificially inflated prices.
CSFB is accused of 'fraud and deceit upon the purchasers of the company's common stock'. All the banks deny any improper conduct in their role as underwriters, and they plan to contest the legal actions. A CSFB spokesman said: 'Our initial public offering practices are in line with the industry. The industry's practices are considered proper by law.'
