In May 2004, Frank Quattrone, the star investment banker of the dot-com era, was convicted in federal court on two counts of obstructing justice and one count of witness tampering. He is scheduled to be sentenced on September 8 and faces up to twenty years in prison. What was the nature of Quattrone's alleged crime? He sent two e-mails, one of which endorsed a subordinate's recommendation that his colleagues carry out their firm's document-retention policy.

Ad Astra per Aspera

Frank Quattrone was born in 1956, the son of an Italian immigrant who worked in a clothing factory and lived in South Philadelphia, that lower-class neighborhood made famous by the film Rocky. According to childhood friend Rosario "Rusty" Lamberto, Frank Quattrone stayed off the mean streets of South Philly because he did not want to be trapped there. Says Lamberto: "Even in grade school, Frank had the foresight to know he wanted to be something special" (Wall Street Journal, May 3, 2001). In parochial school, it is said, Quattrone read four grade levels above his own. And the story is told how, when taking Latin from a teacher who was known to flunk the entire class on the first exam, Frank Quattrone got a grade of 105. In 1973, Quattrone received a scholarship to the undergraduate program of the Wharton School at the University of Pennsylvania and graduated summa cum laude in 1977.
After leaving Wharton, Quattrone spent two years as a junior analyst with Morgan Stanley, then left to get a business degree at Stanford University. Upon receiving his degree in 1981, Quattrone rejoined Morgan Stanley and put down roots in Silicon Valley. At the time, "big Wall Street firms regarded tech banking as just an interesting niche. But Quattrone believed that the tiny struggling companies that then made up the tech galaxy were destined to become fast-growing giants. Building relationships with them was certain to pay off, he argued, even if it took a long time. All that, of course, seems obvious in hindsight. But at the time it was revolutionary. 'He was the first guy in the New York investment banking world to take Silicon Valley seriously,' says well-known tech investor Roger McNamee. 'He was the first guy at a major firm who bet his career on Silicon Valley'" (Peter Elkind and Mark Gimein, "The Trouble with Frank," Fortune, August 13, 2001).
To fit in with the Valley's bohemian techies, Quattrone cultivated an image as "the un-banker." He grew a large bushy mustache, wore ugly sweaters, and joined clients in karaoke sessions. By 1990, Quattrone had worked his way to the leadership of his firm's technology group. In that year, too, he worked on the initial public offering (IPO) of Cisco Systems. In 1994, he moved Morgan Stanley's technology group to Silicon Valley, and in 1995 he led the IPO for Netscape. By this time, after nearly twenty years as an investment banker, his annual salary and bonus had reached $6 million, not nothing but hardly eye-popping. And he complained. He felt that "he and his group were understaffed, underfunded, and underappreciated" (Elkind and Gimein). To remedy the situation, Quattrone came up with a proposal that would give his group not just their salaries and bonuses but a percentage of what he called the firm's "tech revenue pool," including trading commissions on stocks his team had underwritten. Morgan executives rejected his plans, and Quattrone jumped (along with his top deputies, George Boutros and Bill Brady) to Deutsche Morgan Grenfell (DMG), the securities unit of Deutsche Bank.
Leaving Morgan Stanley may have been inevitable for Quattrone, but going to DMG was the work of his former Morgan Stanley mentor Carter McClelland, who had made the transition the year before and now offered Quattrone what he wanted in order to establish DMG in Silicon Valley. What that meant, essentially, was giving Quattrone a firm within a firm, a firm whose people considered themselves to be working for Quattrone rather than for a bank in Germany. In early 1997, Quattrone landed his first big deal for DMG: Amazon's initial public offering. A year later, though, the German parent company announced massive lay-offs and gave up thoughts of expanding their American investment branch. McClelland resigned, and his replacement did not care for Quattrone's independence. Once again, it was time to move on.
In mid-1998, Quattrone, Boutros, and Brady announced that they were leaving for Credit Suisse First Boston (CSFB), and though they were personally barred from contacting their colleagues about joining them, CSFB was not. In a matter of days, virtually all of DMG's 150-man tech group had elected to follow their boss. In fact, so thorough was the raid that no trek had to be undertaken. CSFB simply bought DMG's building in Palo Alto and changed the signs on it. Once again, Quattrone had his own sub-unit, CSFB's Global Technology Group, which would give clients the treatment Quattrone thought they deserved. Indicative of that treatment is the story told by Peter Jackson, CEO of Intraware: Quattrone assured Jackson, "We will stay up all night to get this deal done." And one of Quattrone's associates actually did sleep under his desk while working on the project (WSJ, May 3, 2001). The results of such diligence were impressive. Quattrone turned CSFB into a competitor of Goldman Sachs and Morgan Stanley Dean Witter. Specifically, he helped boost CSFB's underwriting rank in IPOs from No. 8 in 1998 to No. 4 in 1999. And he tripled the firm's stock-underwriting fees from $203 million in 1998 to $686 million in 1999 (WSJ, June 26, 2000). Estimates place Quattrone's salary and bonuses during this time at more than $100 million.

The E-Mails

In the time leading up to Frank Quattrone's trial, several common practices connected with IPOs came under attack in the press, and particularly in the Wall Street Journal, whose news pages are as anti-capitalist as its editorial page is pro-capitalist. After these practices were assailed in the Journal and elsewhere, investigations were begun by the U.S. Securities and Exchange Commission, the National Association of Securities Dealers, and a federal grand jury. To me, the practices seem moral. I do not think the acts should be considered sins, much less crimes. But that is a discussion for another time. The point here is that Frank Quattrone was not charged with committing those acts. The argument, as we shall see, is that Quattrone feared being charged in connection with such acts and therefore engaged in obstruction of justice.
 It became obvious that prosecuting Quattrone might well be a popular exercise of power.
In late January 2003, the Wall Street Journal was tipped off about an e-mail sent by Frank Quattrone that could, if you looked at it just right, be interpreted as an attempt to get rid of documents that might be used in a criminal investigation. What was this e-mail, and why might it constitute obstruction of justice? (The following account is taken from the indictment of Frank Quattrone.)
At 6:20 p.m., on December 4, 2000, CSFB's Global Head of Execution—Technology Group, Richard Char, sent to Frank Quattrone and some other people an e-mail that read in part: "With the recent tumble in stock prices, and many deals now trading below issue price, I understand the securities litigation bar is mounting an all out assault on broken tech IPOs. In the spirit of the end of the year (and the slow down in corporate finance work) you may want to send around a memo to all corporate finance bankers . . . reminding them of the CSFB document retention policy and suggesting that before they leave for the holidays, they should catch up on file cleanup. Today, it's administrative housekeeping. In January, it could be improper destruction of evidence." Three minutes later, Quattrone replied: "You shouldn't make jokes like that on email!"
Another recipient of Char's e-mail (the head of West Coast Corporate Finance) suggested that Char send the proposed memo under Char's name, his name, and name of the name of another senior officer, the Global Head of Corporate Finance. At 8:13 p.m. Char did just that. Believe it or not, the indictment against Quattrone says of his eight-word rebuke to Char: "Through this email Quattrone authorized the Head of Execution to send the proposed reminder." Wouldn't the normal human mind conclude that it was the head of West Coast Corporate Finance who took the lead in telling Char to go ahead with his proposed e-mail?
The e-mail Char sent read as follows:
"With the recent tumble in stock prices, and many deals now trading below issue price, I understand the securities litigation bar is expected to [sic] an all out assault on broken tech IPOs.
 
"In the spirit of the end of the year (and the slow down in corporate finance work), we want to reminding [sic] you of the CSFB document retention policy. The full policy can be found at [this intranet site]. The relevant text is:
"'For any securities offering, the Designated Member [of the deal team] should create a transaction file consisting of [items (i) through (v)].'
 
"So what does this mean? Generally speaking, if it is not (i) - (v), it should not be left in the file following completion of the transaction. That means no notes, no drafts, no valuation analysis, no copies of the roadshow, no markups, no selling memos, no IBC or EVC memos, no internal memos.
 
"Note that if a lawsuit is instituted, our normal document retention policy is suspended and any cleaning of files is prohibited under the CSFB guidelines (since it constitutes the destruction of evidence). We strongly suggest that before you leave for the holidays you should catch up on file cleaning."
At 8:18 p.m., after the e-mail had been sent to all members of his group, endorsed by three executives, Quattrone drafted but did not send the following fragmentary e-mail, addressed to Char and all the recipients of his e-mail: "Having been a key witness in a securities litigation case in south texas (miniscribe)." To this he attached the text of Char's e-mail. The next day at 9:28 p.m., Quattrone completed and sent the e-mail: "Having been a key witness in a securities litigation case in south texas (miniscribe) I strongly advise you to follow these procedures." This was the e-mail that, together with the rebuke about joking, led to Quattrone's being accused of obstruction of justice and witness tampering.

The Charge

According to the indictment: "At the time Quattrone directed, and caused a subordinate to direct, the destruction of evidence related to the IPOs, he knew of the existence and nature of the regulatory and law-enforcement investigations and knew that CSFB had received subpoenas that required the production of documents relating to the IPOs." The indictment also says that Quattrone acted "with the intent to obstruct the investigations by the SEC and the grand jury"(emphasis added).
To sustain this charge, the reasoning must be: (1) Quattrone knew that investigations into his actions were underway. (2) He knew these investigations to be of a sort that demanded the company's document-retention policy be suspended. (3) He feared the consequences of these investigations. (4) By complete coincidence, he received from Char (who did not know of the investigations) a memo urging the implementation of CSFB's document-retention policy. (5) Knowing that he should not do so, Quattrone urged (or at least permitted) his associates to act on Char's innocent memo in the guilty hope that it would frustrate the investigations of his team.
To sustain the charge against Quattrone, all five links in that reasoning must be sound. In my reading: (1) is debatable. (2) is highly questionable. (3) is likely. (4) is certain. (5) is unlikely.
In attempting to prove that (1) was true—that Quattrone knew of investigations into his actions—the government introduced documents that raise substantial doubts about (2): that he understood the investigation to be of the sort that would suspend CSFB's document-retention policy. (Again, this account is taken from the indictment.)
 
Here is an e-mail exchange that took place between Quattrone and CSFB's general counsel, David Brodsky, on December 3, the day before Char sent his proposal regarding document-retention.
 
Brodsky to Quattrone: "As you may know, there's been an inquiry going on by both the SEC and NASD into our allocation process in the IPO market."
Quattrone to Brodsky (paraphrased): Email me some details of your concerns.
Brodsky to Quattrone: "Briefly, and this should absolutely not be passed on to anyone else, we have received Federal Grand Jury subpoenas asking for testimony and documents about the IPO allocation process from the firm." Because Quattrone did not have responsibility for the final, formal approval of IPO allocations, people may reasonably debate whether he understood these investigations were into his actions. But look at the remainder of the e-mail exchange.
Quattrone to Brodsky: "Are the regulators accusing us of criminal activity?"
Brodsky to Quattrone: "They are not formally accusing us or individuals yet, but they are investigating because they think something bad happened. They are completely wrong but merely being investigated and having something leak could be quite harmful, so the idea is to get them to back off their inquiry, we educate them as to the entire IPO process, including the allocation issues and criteria and urge them to back off."
Three minutes later, Brodsky wrote again to Quattrone: "But please do not under any circumstances discuss these facts with anyone—however innocently—because everything we say now is going to come under a microscope. I know these people and how they work and I am controlling the flow of information on an extremely tight need to know basis."
To me, this exchange sounds as though Quattrone believed the key distinction lay between an inquiry—an examination, a look-see—and a civil suit or criminal prosecution. Char seems to have drawn the same dividing line. Note that his memo says: "If a lawsuit is instituted. . ." It might well have seemed to Quattrone, Char, and other non-lawyers to be like the distinction between a police car pulling up behind you to see if you are doing anything wrong and a policeman pulling you over. Until you are stopped, you can proceed normally, particularly if (as Brodsky assured Quattrone) you are proceeding in perfect compliance with the law.
In that light, consider what Brodsky told Quattrone: There were no formal accusations and he (Brodsky) expected that there would be none in the end. Therefore, he had not told many people at CSFB about the investigation, because he did not want word of it to leak out. Quattrone was absolutely not to tell anyone. Brodsky would "educate" the investigators about the allocation process, and "urge them to back off."
From this, I conclude that Quattrone did not know that the inquiry about which Brodsky had informed him required suspension of the company's document-retention policy. How could it, if Brodsky (who Quattrone surely assumed would know what he is doing) had not told many people about the investigation and had ordered Quattrone not to tell them? Not only was Brodsky not telling Quattrone to suspend CSFB's document-retention policy (which Quattrone must have assumed he would do if it were required), Brodsky had actually issued a gag order that made it practically impossible for Quattrone to order the policy suspended.
In hindsight, of course, we know that events did dictate a suspension of CSFB's policy on document-retention, for the policy was more subtle than Quattrone and Char apparently realized. It said: "No document may be destroyed if (i) CSFB has been made a party to litigation involving such transaction or has received a subpoena which calls for the production of such documents or (ii) it is reasonably likely that litigation may be commenced in connection with such transaction of any matter relating to CSFB's involvement therein." Although the emphasis is on present or likely litigation, about which Brodsky had reassured Quattrone, the phrase "or has received a subpoena" is present, and Brodsky had told Quattrone that subpoenas had been issued. Thus, if one puts together all of the information possessed by Quattrone, in just the right way, one could argue that he had sufficient information logically to deduce that the document-retention policy should be suspended. But did he put it together in that way? I think that his questions to Brodsky show he did not put it together in the way he was accused of doing, and that Brodsky's gag order reinforced his belief that the document-retention policy was not yet suspended.
(3) Did Quattrone fear the consequences of the investigation: No, No, and Yes. No, the problem he and Char were worrying about was future litigation initiated through civil lawsuits. It was on Char's mind and, after Char's e-mail, that was what was on Quattrone's mind. No again, because Brodsky told him he would "educate" the investigators and they would back off. But I must also say: Yes, because Quattrone knew the muckrakers were in full howl, and he probably knew that a determined prosecutor could always nail you on something. In addition, he also knew that a lot of prosecutors would want to be the one who nailed "the Milken of the 1990s."
(4) That Quattrone received Char's memo urging an implementation of CSFB's document-retention policy is undoubted. But it is significant that no one has ever suggested that Quattrone originated the idea. If this was the means by which a fearful Quattrone hoped to escape the government prosecutors' clutches, it is odd that so enterprising a man had to wait for the seemingly innocuous tactic to be suggested. Yet the prosecution tried to show just the opposite. "It was no coincidence, the prosecution charged, that the SEC and a federal grand jury had just commenced their probes of CSFB's IPO practices and were about to get their hands on the files" (Globe and Mail, October 27, 2003). In fact, we know for certain that it was a coincidence. We know that because the initiative to clean up the files came from Richard Char who had no knowledge of the probes and who set forth very clearly in his own e-mail his reasons for thinking about cleaning up the files. It was a convenient time of year, and it was prudent in the existing climate of scapegoating.
(5) Lastly, we must ask: Did Quattrone believe he could escape the clutches of muckraking journalists and prosecutors by implementing CSFB's document-retention policy? He probably thought (as Char evidently did) that it was a means to keep extra ammunition from falling into enemy hands and that they should employ it while they were still allowed to. If a litigator or prosecutor went after the fundamental operating procedures of his team, Quattrone would and could deal with that, as Brodsky had said. But when Quattrone referred to the Miniscribe suit in south Texas, what he had in mind is what he saw there: Lawyers twisting innocent documents out of all context. Said Sheldon Silver, one of the jurors who later convicted Quattrone: "He overreacted, thinking: 'Oh, maybe they'll find something.' That's what's very sad about this" (SiliconValley.com, May 4, 2004). No—what is very sad is that American businessmen know "they" will find criminal conduct if they want to. If America's most productive businessmen feel compelled to engage in evasive tactics when legal investigators come calling, even when those businessmen are completely innocent, it does not speak ill of them. But it speaks very ill of our laws and our law-enforcers.

The Two Trials

At Frank Quattrone's first trial, which ended in a hung jury, the defense clearly made a strategic mistake. They tried to say that Quattrone would not engage in obstruction of justice because he did not believe he had anything to fear from the investigations, and the reason he had nothing to fear, they alleged, was that he did not have final, formal responsibility for the allocation of IPO shares. Jury deliberations began on October 15, and on October 17 the tide turned against Quattrone. "Three jurors led by Stuart Siegel, a 36-year-old software developer, were about to switch their votes to guilty on two of the three counts of obstruction of justice and witness tampering, raising the tally to 8-3 in favor of conviction." Siegel, it seems, did not believe in Quattrone's lack of authority over IPO allocation. When Quattrone's testimony regarding that issue was discussed, it became clear that he had avoided lying by choosing his words carefully. That made a bad impression. "'It contained a fair amount of wordsmithing,' Mr. Siegel observes, adding, 'It doesn't have to be a lie to be untruthful.'" Said Siegel: "'I no longer bought the story about the firm division' of IPO allocations occurring outside Mr. Quattrone's investment-banking unit" (WSJ, October 27, 2003). Fortunately, several jurors refused to go along.
In the second trial, Quattrone did not assert his complete remove from the allocation process. On the contrary. "This time, he freely admitted that he played a role in IPO allocations. But the candid acknowledgement came at a cost: It weakened his contention that he wouldn't have had any reason to be concerned about the original IPO probes" (WSJ, May 4, 2004). Why? Brodsky had assured Quattrone that the investigation would come to nothing.
Nonetheless, the jury took less than one day of deliberation to find Quattrone guilty on all three counts. Said juror Sheldon Silver, a receptionist: "You don't get to be where he was in that field and not know what's going on" (WSJ, May 4, 2004). So much for a finding of criminal intent.
Following the trials, U.S. Attorney David Kelley issued a statement that summed up the basis for his case against Quattrone. "CSFB's Legal and Compliance Department . . . instructed [Quattrone] to produce various IPO-related documents that he and other CSFB investment bankers in the Global Technology Group created and maintained." Wrote Forbes reporter Dan Ackman: "This statement is false and it's stunning that the U.S. Attorney could deliver it in writing. The evidence at trial was undisputed that when David Brodsky, CSFB's top lawyer, contacted Quattrone, he did not tell him to retain or produce documents" (Forbes.com, May 4, 2004).
U.S. Attorney David Kelley's statement confuses three different events.
It would seem that Kelley's statement confuses three different events. On June 5, 2000, Quattrone was directed to "collect and produce" documents in his possession relating to the VA Linux IPO. On October 15, 2000, CSFB's lawyers directed Quattrone to forward all documents relating to the Selectica IPO. Quattrone responded to these requests. In the December e-mail exchange between Quattrone and Brodsky, Quattrone was not asked to collect and produce documents. What the U.S. attorney is doing, then, is taking the fact that Quattrone was asked in June and October to produce two very specific sets of IPO documents, dropping out all mention of the dates and specifics of these requests, and then setting those requests down into the middle of a description of what took place at the time Quattrone sent his "clean-up" e-mail. In the words of Juror Siegel: "It doesn't have to be a lie to be untruthful."
So far from instructing Quattrone to produce documents in December, Brodsky told Quattrone not to worry and not to mention the investigations. He (Brodsky) would "educate" the investigators and get them to back off. As Ackman wrote: "In his closing statement, Assistant U.S. Attorney Anders conceded that CSFB's lawyers were at fault. 'We are not standing up here and saying the way CSFB's internal and external lawyers handed this was right, because it wasn't. It was wrong.'" But how exactly was it wrong, and how did their "wrong way" of handling the matter affect Quattrone's inferences about what he was expected to do and what he was entitled to do? Doesn't their "wrong way" of handling the matter cast doubt on Quattrone's criminal intent? I think it does.

The Meaning of the Quattrone Case

What did journalists, writing their first rough-draft of history, make of the Quattrone case? For the most part, they wrote as they have since the days of the original muckrakers: Businessmen are greedy, and their greed leads them to practice deceit and commit crimes. After Quattrone's indictment, the Mercury News, the hometown paper of Silicon Valley, said this: "Quattrone was one of the most successful financiers the valley has ever seen. Now he has become the personification of the valley's worst excesses, a reminder of a time when greed blinded so many in this valley" (April 24, 2003). After the first trial, Newsday's Charles V. Zehren wrote. "The tale heard by the jury . . . simply laid bare the sort of greed, lies and self-deceptions that pumped up the dot-com bubble."
Career advancement via legal persecution was one likely motive at work in the Quattrone prosecution.
Those who defended Frank Quattrone said, yes, greed lay behind Quattrone's downfall, but it was the greed of an era rather than the greed of one man. An op-ed by Andy Kessler in the Wall Street Journal was typical: "My old colleague Frank Quattrone was convicted on three counts of obstruction of justice on Monday. Guilty? Innocent? Who knows, but he is taking the fall for a lot of sins. And that, I suppose, is how eras end" (WSJ, May 6, 2004).
Because I do not think that greed is a vice, much less a crime, I disagree with this analysis. I think the meaning of the Quattrone case lies not with those who seek great wealth but with those who hate them and seek power over them. In this connection, one should notice a timeline that has not been given sufficient attention. Quattrone sent his famous e-mail on December 5, 2000. Regulators knew about it as early as October 2002. According to Dan Ackman of Forbes: "That is when Quattrone was questioned about it by National Association of Securities Dealers investigators. The matter was allowed to rest until the e-mails were leaked to the Wall Street Journal in late January 2003. At that point, the U.S. attorney got interested. Within a few days, the word was out that Quattrone was facing obstruction of justice charges" (Forbes.com, May 4, 2004).
In other words, once the muckrakers had raised a hue and cry, it became obvious that prosecuting Frank Quattrone might well be a popular exercise of power. After all, it was in part by prosecuting Michael Milken that Rudolph Giuliani became the mayor of New York City, and as Adam Lashinsky of Fortune said: "Symbolically, [Quattrone was] the big fish, as big to this era's story as Michael Milken was to his" (February 5, 2003). Not surprisingly, then, within days of the Journal story about Quattrone's e-mail, New York's politically ambitious attorney general was fighting with the U.S. attorney in Manhattan for the glory of taking Quattrone's scalp.
Another motive that may be operating in the prosecution of businessmen is intimidation.
But even career advancement via legal persecution is relatively benign when compared with another motive that may be operating in the prosecution of businessmen: intimidation. Many people have observed of Quattrone and Martha Stewart: "It was the cover-up, not the crime—and there was no crime." How can we understand that? Why would prosecutors want to ruin the lives of people who had basically done nothing wrong? The explanation, I think, is that many people who wield coercive power develop narcissistic personalities and become enraged when they suspect that someone is trying to evade their power.
Former federal prosecutor Orin Snyder said that the convictions of Martha Stewart and Frank Quattrone "send a message to Wall Street that says, if you or your company or anyone in your vicinity is under investigation, do not do anything that could be interpreted by anyone as interfering with that in any way" (New York Times, May 4, 2004). Read that again: "If you or your company or anyone in your vicinity is under investigation, do not do anything that could be interpreted by anyone as interfering with that in any way." To me, that sounds like the way people in the Soviet Union were expected to react when a KGB agent came to their apartment building—with fear and trembling. Is that the reaction that U.S. prosecutors and regulators now expect from American businessmen? All too often, I believe, it is.
 

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