Inside Frank Quattrone's Money Machine
Nobody knew it at the time, but the apex of the Internet rocket ride came on the morning of Dec. 9, 1999. Executives of computer maker VA Linux Systems Inc. gathered at 6 a.m. in the trading offices of Credit Suisse First Boston (CSR ) on the 17th floor of a San Francisco skyscraper for the company's initial public offering. Among those assembled were Larry M. Augustin, the chief executive, and his friend Linus Torvalds, the inventor of the Linux operating system, who was dressed in his customary T-shirt and sandals. Their three toddlers scampered around underfoot while the adults watched in stunned silence as the stock price jumped from 30 a share to more than 200 within minutes. Augustin nudged Torvalds and whispered: "Did you ever think we'd be here?" At the end of trading, the company's shares were worth 239.25 apiece, up 697.5%, making it the best-ever first-day IPO performance.
The person they had to thank for this heady experience was Frank Quattrone, then head of CSFB's technology investment banking business. During more than two decades in Silicon Valley, the working-class kid from South Philadelphia had harnessed the forces of capital and innovation to create a money machine that showered the Valley with fabulous fortunes and helped drive productivity growth in the U.S. economy. Think of almost any household name in technology, from Amazon.com (AMZN ) Inc. to Cisco Systems Inc. (CSCO ), and Quattrone's fingerprints were on it -- whether he helped the company raise venture capital, took it public, or advised its CEO on strategy.
Quattrone not only stood at the intersection of power and wealth in the high-tech economy but was also one of its chief architects. He put the deals together, controlled who got in, and helped hand out the bonanzas. He was both a powerbroker and a rainmaker -- a highly lucrative combination. Over the years, he led hundreds of IPOs and other financings, raising $65 billion for tech companies. But it was the tech stock boom that pumped his image up to near-mythic proportions. The ultracompetitive Quattrone and his team led 138 high-tech IPOs from 1998 to 2000, nearly as many as the next two -- Goldman Sachs & Co. (GS ) and Morgan Stanley (MWD ) -- combined, according to market researcher Dealogic.
Today, only the lawyers are getting rich. Frank Quattrone, 47, pale and puffy-eyed, occupies a chair at the defendant's table in U.S. District Court in lower Manhattan, where his trial on federal obstruction-of-justice charges began on Sept. 29. Federal authorities charge that he interfered with an investigation into improper allocation of IPO shares by sending an e-mail to his employees on Dec. 5, 2000, urging them to purge unnecessary documents. He insists this was an innocent, routine reminder of company procedures. To drive home this point, Quattrone is expected to take the stand in his own defense. It's a risky strategy. But Quattrone, whose powers of persuasion helped land scores of deals, is betting that the same personal touch will swing the jury to his side. If he's convicted, legal experts say he could serve one or two years in jail.
Meanwhile, Quattrone faces a much broader inquest by the National Association of Securities Dealers into a whole range of alleged rules violations, including making improper IPO share allocations and offering potential clients favorable analysts' coverage -- charges he also denies. The NASD investigation was triggered by a tip about stock allocations that surfaced the day of Quattrone's triumphant VA Linux IPO. Roger B. Sherman, the NASD's senior vice-president for enforcement, testified at Quattrone's trial. By the time this process is over, much of Quattrone's professional life will have been laid bare -- and thoroughly picked over.
It makes for a remarkable and sobering tale. In a two-month investigation, BusinessWeek delved into Quattrone's financial empire, turning up details on his web of interwoven dealings that underpinned the Internet economy -- and the greed that fueled them. Take Quattrone's pay package. BusinessWeek has learned how Quattrone used his clout and connections to mint a personal fortune. Quattrone's team reaped at least one-third of all the revenues they brought in above an annual quota, say three sources familiar with the arrangement. In 1999 alone, $600 million poured into Quattrone's outpost, giving select participants in his group an estimated take of nearly $150 million. The next year, the team's revenues jumped to $1.4 billion, says an ex-CSFBer, landing them an even fatter payday. Quattrone alone pocketed $200 million between 1998 and 2000, according to the NASD. Typically, at that time, top managing directors in investment banking took in $8 million to $10 million, according to estimates from Wall Street compensation tracker McLagan Partners Inc.
Interviews with more than three dozen Quattrone colleagues, business associates, and friends reveal how he pieced together his empire. With the blessing of his superiors, he supervised the managers of not just investment bankers but also stock analysts and brokers. He also had budgetary control of his group -- power enjoyed by virtually no other managers at CSFB. "The deal was almost like a joint venture, totally independent," says William L. Burnham, a former analyst who worked with Quattrone at CSFB.
That independence handed Quattrone more power and control than anyone else in tech banking. And he used it. His firm's gifts of IPO shares to potential clients, which Quattrone's defenders say were legal, were good for business. But the gifts drove a wedge between the interests of individuals and their companies. And the grand paychecks for his team made it possible for CSFB to attract top producers -- even though critics say they rewarded bankers for the sheer number of deals, regardless of quality.
TACTICS ON TRIAL. While it's Quattrone who is facing justice in Manhattan, a wide swath of Silicon Valley stands trial as well. Quattrone's banking tactics, many of which he pioneered, were adopted by other banks, ultimately becoming business-as-usual in the tech industry. This snowball effect helped create the market mania of the late 1990s and the resulting crash of NASDAQ stocks that cost investors more than $5 trillion. If Quattrone is found guilty, the high-tech capital of the world may face increased pressure to overhaul its tight-knit culture.
Even in the face of the market collapse, scandals, and greater regulatory scrutiny, Silicon Valley today clings to the system that made Quattrone the most powerful high-tech financier ever. It's one that locks together the interests of venture capitalists, bankers, lawyers, and entrepreneurs, much like Japan's keiretsu. This sharing of information and advice often improves the performance of companies and hastens innovations to market. Yet the system creates conflicts of interest. Even now, lawyers continue to take equity and sit on the boards of client companies. Banks still invest in startups they take public. And tech executives still get rich off the money they sink into their venture backer's funds.
A whiff of reform is in the air. "Silicon Valley has to grow up. We can no longer think we're this cute little outlaw place where we make our own rules," says William V. Campbell, chairman of software maker Intuit Inc. (INTU ) and adviser to startups. But in the offices and cozy lunch spots along U.S. highway 101, there's also an impulse to let bygones be bygones, and to let Quattrone off the hook, too.
Quattrone can still count on an army of friends and former business associates to come to his defense. They contend he's taking the fall for an ambiguous regulatory system that failed to restrain behavior that became commonplace as markets and investors stampeded out of control. His supporters include veteran venture capitalist C. Richard Kramlich, legendary high-tech investment banker Sanford R. Robertson, and entrepre- neur James Clark, a co-founder of Netscape Communications Corp., which Quattrone took public. "The whole thing is a bit of a witch hunt," says Clark. "Frank has been caught in the squeeze between people who make a mark by prosecuting people and the momentum of the times."
What drove Quattrone? He declined to comment for this story. But interviews with those who know him paint a picture of a man who started off with a noble mission: to help build Silicon Valley into an economic powerhouse. But when the markets crested so frothily, Quattrone rode the wave faster and farther than anybody else. He became less tied to the details of a deal -- and more focused on landing the deal. He was swept along by a confluence of driving ambition, the potential for untold riches, and the willingness of investors to devour whatever they were served.
A FASCINATION WITH RISK. Quattrone's relentless drive to be No. 1 came to life on the streets of Philadelphia. He was inspired by his father, an Italian immigrant who worked in a clothing factory and made ends meet by wallpapering on weekends. Quattrone worked hard, too, and scored in the 99th percentile nationally on a scholarship entrance exam to win entry into the all-boys St. Joseph's Preparatory School in inner-city Philadelphia. One thing Quattrone took away from St. Joe's was an intellectual fascination with taking risks. In an essay on Homer's Odyssey, he focused on the qualities that make up strong leaders. "The point of his essay was that real leadership involves danger and the assumption of risk without assessing the pain and suffering it might cause the leader," says Harry Bender, who taught him ancient Greek. "I gave him an A."
Quattrone got a chance to put his ideas to the test when he launched his business career. Wall Street considered Silicon Valley a backwater in 1981, when he earned an MBA from Stanford University Graduate School of Business, after graduating summa cum laude from the University of Pennsylvania. No major investment bank saw a reason to even put an office there. But Quattrone became obsessed with the Valley's nascent tech industry and, against the advice of senior investment bankers, decided that this was where he would make his mark. After landing a job at Morgan Stanley's branch office in San Francisco, he worked tirelessly to master the tech fundamentals -- attending computer industry events, such as the Comdex trade show. Later, he moved his family to the Valley. "I'm sure people [on Wall Street] thought he was out of his mind," says Roger B. McNamee, a veteran tech investor at buyout firm Silver Lake Partners. "It was like Bob Dylan going electric. It was radical and beyond weird."
Not only did Quattrone live among the Valley's techies, he went native. His goal was to build a vast network of venture capitalists and entrepreneurs he could count on to pass on scoops about up-and-coming companies or give him the inside track on landing the next IPO. He was a world-class schmoozer, immediately identifiable by his mop of brown hair, crew-neck sweater, and bushy mustache. By the time he became head of Morgan Stanley's West Coast technology practice in 1986, he was inviting the Valley's players along on ski trips to Utah's Deer Valley and golf outings at Pebble Beach, Calif.
RIGHT STUFF. He used the events to show the Silicon Valley crowd that he was just like them -- and that he understood their financial needs better than the suits on Wall Street. He wasn't afraid to be a regular guy, either, charming his guests with raucous renditions of Rocky Racoon during late night karioke sessions. The crowd ate it up. It was the first time anyone from a big-name bank showed real interest in their fledgling industry. "Tech entrepreneurs related to Frank," says Harvey Jones, former CEO of Synopsis Inc., a chip design company in Mountain View, Calif., that Quattrone took public in 1991.
The formula clicked. He combined Morgan Stanley's resources and stellar reputation with his own rainmaking skills to line up some of the most coveted IPOs of the time, including Silicon Graphics (SGI ), and Cisco Systems. With his star rising, he took over Morgan's Global Technology group in 1991. Even though his responsibilities spanned the globe, in 1994 he was the first to put an investment banking office in the Valley, when he transplanted his from San Francisco to Menlo Park, Calif. -- within walking distance of the Valley's venture-capital firms.
Collectively, these moves and his connections helped land the Netscape IPO, a seminal event. Getting the business was a slam dunk for Quattrone, considering Morgan Stanley's reputation and his own connections with key players like Clark. On the eve of the deal's pricing in August, 1995, he urged Netscape's management to double its offering price, to 28 a share. It was risky, but they took his advice and saw their stock rise 150% on its first day of trading, the biggest jump in Wall Street's history at the time. It was the beginning of the era of excess -- for Quattrone and the tech economy.
The euphoria surrounding Netscape sent Quattrone's status into the stratosphere. He pushed for greater control at Morgan Stanley, stretching his leadership to research, where analysts issue reports on the financial prospects of companies. That had always been traditionally managed separately all along Wall Street to avoid conflicts of interest. When his Morgan Stanley bosses refused, Quattrone quit, taking eight colleagues with him to start up a new tech banking practice for Deutsche Bank Securities Inc., which gave him the control he craved. Within two years, in mid-1998, he had defected again, for an even better deal, this time at CSFB.
Quattrone's goal was to get ever larger slices of the huge payday the Internet boom offered, according to former associates. At CSFB, he cut a deal with management that in 1999 gave him and his employees at least 33% of the revenues the group brought in over $150 million, in addition to their salaries, say former Quattrone colleagues. Their banking revenue tally was $600 million that year, meaning Quattrone had nearly $150 million to divvy up among select associates. The package, say critics, emphasized near-term results over long-term investment returns. On top of that payoff were profits that Quattrone and his senior bankers were raking in from their investments in venture-capital firms or in startups, such as Web-site software maker Interwoven (IWOV ), and PC maker eMachines. CSFB declined to comment on the pay package, but former employees say Quattrone made it rain money. "It was a nice place to be," says one of them with a chuckle.
To maximize the money flowing into his own group, Quattrone had created a distinctive structure that helped him win the greatest number of deals. The chiefs of investment banking, research, and private-client services reported to him. That way he could call on -- and control -- any resource required and present a single face to the client. When he or other bankers pitched to CEOs to manage their IPO, they would take a team with them: investment bankers to talk about how much money they could bring in, analysts to show off their knowledge of the competitive landscape, and client-services people to offer up a menu of personal investment services. In other cases, commercial bankers were brought along to discuss raising debt.
The structure itself didn't break any laws, but Quattrone's accusers say the way he leveraged it violated both NASD rules and basic business ethics. For example: More than 300 accounts were created for so-called Friends of Frank, people who might give CSFB banking business in the future, and they were handed shares in upcoming IPOs, according to NASD. A senior executive at eGreetings Network Inc. was given 1,000 shares in VA Linux, for instance -- and sold half of them a day later for a profit of more than $83,000. A week later, CSFB took eGreetings public and collected $1.6 million in fees, says the agency.
Quattrone has denied having any authority or influence over IPO stock allocations. His defense argues that CSFB's compliance department reviewed tech's private-client-services structure and deemed it legal and appropriate. Moreover, his defense says that CSFB's leadership worked to avoid conflicts between business units by having the chiefs of brokers and researchers also report to the heads of their respective divisions. Several former DMG and CSFB analysts defend Quattrone's integrity. J. William Gurley, formerly of DMG and now a venture capitalist, says Quattrone backed him when he issued a tough report on Netscape and gave a thumbs-down to the At Home Inc. IPO. As a result, DMG lost investment banking business. "These are real world examples where I made decisions with a huge negative impact on banking and was supported in full," he says.
FACING THE MUSIC. As the market frenzy intensified, though, some in Silicon Valley lost faith in Quattrone. They say that instead of being driven by the region's entrepreneurial spirit, he was consumed by a thirst for power. An early indicator was a now-infamous letter he sent to clients in 1998 when rumors circulated that he might leave DMG. "We are here to stay. Please trust us," he pledged. Yet four months later, Quattrone and virtually his entire team jumped ship to CSFB. "For him, it was all about getting a better deal," says Richard E. Belluzzo, then CEO of high-performance computer maker Silicon Graphics Inc., which was in the midst of a Quattrone-managed spin-off of chip maker MIPS Technologies Inc. (MIPS ) Robert A. Chlopak, a spokesman for Quattrone, says that the move to CSFB was prompted by unexpected changes within Deutsche and that most of Quattrone's clients came with him. "If people didn't trust him, that wouldn't have happened," says Chlopak. Deutsche declined comment.
When the going was good, there was little Quattrone would not do to win business. Peter H. Jackson, CEO of software company Intraware Inc., recalls that when he was preparing to take his company public, in late 1998, he told CSFB bankers that he was tired of being "dragged around to meetings like a mule." The next morning, a live mule was delivered to the lobby of Jackson's office building in Orinda, Calif., with a bottle of wine tied around its neck. "Stop feeling like a mule and pick CSFB," said the note signed by Quattrone. That touch helped CSFB win Intraware's business.
But when the bottom fell out of the market, Jackson says that the game changed abruptly. Intraware's stock plunged from a peak of 99 a share in early 2000 to less than 5 by the end of that year. Jackson, worried that his company might go belly-up, was looking for financial aid and advice. But CSFB had already written him off. Ultimately, Intraware went through a massive downsizing, narrowly avoiding bankruptcy. Says Jackson: "I thought these guys would take care of me through thick and thin. But I was like an ex-wife at that point." Quattrone's defense says he was not personally involved in Intraware and that CSFB did help troubled companies, such as Handspring Inc., when it was able to do so.
It wasn't long before Quattrone himself was everybody's ex. As the stock market went into a tailspin, prosecutors and regulators began questioning all of Wall Street. Quattrone's money machine attracted intense scrutiny. Although CSFB stuck by him long after his business melted away, it forced his resignation on Mar. 4, just days before NASD filed charges. Federal prosecutors arrested him on Apr. 23, and the world was treated to yet another capitalist perp walk outside a Manhattan courthouse.
Now, seated at the defense table in the courtroom of Judge Richard Owen, Quattrone's days of wealth and power in Silicon Valley seem a long way off. Legal experts say he has a reasonable chance of being cleared because the criminal case hinges on one e-mail, and prosecutors will have to prove that he intended to hinder their probe. But it will be harder for him to escape censure by NASD because of the public outcry in the wake of corporate scandals. An adverse finding could result in his being banned from the banking industry for life and heavily fined. Like Odysseus, Quattrone was a leader who was not afraid to take risks. And now he's facing the consequences.
By Linda Himelstein
With Steve Hamm in New York and Peter Burrows in San Mateo, Calif.