Frank Quattrone: Comeback Kid

His new tech-focused investment bank, Qatalyst, will focus on M&A and investing in new businesses. Will his touch still be golden?

California has always been a land of second chances. Now, the banker Frank Quattrone, who helped finance Silicon Valley's boom of the 1990s and was later cleared of federal obstruction-of-justice charges, is betting he can stage a comeback in the state's once-again bustling technology corridor.

On Mar. 18, Quattrone, who helped take some of the technology industry's most successful companies public and advised clients on hundreds of deals, announced he's starting a tech-focused investment bank called Qatalyst Group. The company, which includes former colleagues from Quattrone's days at Credit Suisse (CS), will proffer advice on mergers, acquisitions, and financing, as well as invest in promising new businesses alongside venture capital and private equity firms. While it's waiting for regulatory approval to hang a shingle as an independent firm, Qatalyst will operate as a division of JMP Securities (JMP).

Questionable "Spin"

A new, Silicon Valley-savvy investment bank could gain appeal, with tech-industry financing at its highest in years and full-service investment banks distracted by a broadening liquidity crisis that's already led to the collapse of Bear Stearns (BSC). But Quattrone will be dipping into his substantial Rolodex to scout for deals while attempting to remove the stain of a four-year legal battle with federal authorities as the result of a probe into the allocation of shares from initial public offerings.

"His reputation in Silicon Valley is based upon two facets," says Jay Ritter, a finance professor and IPO expert at the University of Florida. "The positive side is, as an investment banker, he and his team were involved in financing many prominent companies. He was one of the most important players in the financing of Silicon Valley," he says. "The negative is, some of his procedures for attracting business were ethically questionable."

While working as a banker at Credit Suisse, Morgan Stanley (MS), and Deutsche Bank (DB), Philadelphia native Quattrone underwrote some of the tech industry's most successful IPOs, including those of (AMZN), Cisco Systems (CSCO), and Netscape Communications, the startup whose offering sparked the Internet IPO boom of the '90s. But Quattrone was accused of obstructing a federal investigation at the beginning of this decade into allocating shares of hot IPOs to hedge funds. The National Association of Securities Dealers brought a separate case against Quattrone for permitting "spinning," a practice at Credit Suisse and other investment banks of allocating IPO shares into the personal brokerage accounts of executives whose companies did business with those banks. The NASD later dropped the charges.

Boutique Focus

Investigators and academics say spinning was used to ensure companies would remain loyal customers. According to a study by Ritter of companies that went public between 1996 and 2000, executives who received such benefits switched investment banks for 5% of follow-on offerings through 2001, compared with 31% of the time for executives who weren't spun. "It was a successful business strategy at attracting deals," he says. While at Credit Suisse, Quattrone oversaw technology-industry investment banking, with partial oversight of research and brokerage activities. Regulators have since taken measures to separate investment banking operations from the divisions focused on selling research on companies that may also be a firm's clients.

After Credit Suisse fell under investigation for its IPO allocation practices, Quattrone reminded colleagues of a company mandate to "clean up" files, resulting in 2003 obstruction-of-justice charges by federal authorities. An initial trial ended in a hung jury. Quattrone was convicted in 2004 in a second trial, but the conviction was overturned on appeal in March, 2006. Within days, the Securities and Exchange Commission overturned a ruling that banned Quattrone from the securities industry for life. A deferred prosecution agreement (, 8/22/06) in August of that year precluded a third trial, and obstruction charges were dropped a year later, in August, 2007.

As he attempts his comeback, Quattrone is positioning Qatalyst as a "boutique" investment bank that can offer tech-industry clients tailored advice without juggling a range of financial services, according to a statement from the company. "In Silicon Valley, it will be warmly embraced," says Lise Buyer, principal of IPO advisory firm Class V Group, who worked with Quattrone at Deutsche Morgan Grenfell and Credit Suisse from 1997 to 2000. "In this marketplace, the investment banks have a lot of balls in the air, and there are advantages to working with someone who's not distracted."

California Dreaming

Quattrone's contacts database is also chock full of some of the most powerful people in tech, including Google (GOOG) CEO Eric Schmidt, Accel Partners' Jim Breyer, and Intuit (INTU) Chairman Bill Campbell. In a press release, each was quoted as saying he looks forward to working again with Quattrone. "The fun of it for him has to be strategic M&A, and that's where he can leverage his contacts most effectively," adds Buyer.

Qatalyst is getting off the ground as the technology M&A and IPO market continue their ascent from the doldrums that followed the crash of the dot-com companies in 2001. Companies paid a median value of $97.5 million for U.S. venture-backed firms they acquired in 2007, compared with $24 million in 2003, according to market researcher Dow Jones VentureSource (NWS). IPOs by venture-backed firms in the U.S. raised $7.4 billion in 2007, vs. $1.45 billion in 2003.

To assist in the comeback, Quattrone recruited former colleagues, including Jonathan Turner, the former head of Credit Suisse's Internet group, and Adrian Dollard, a former general counsel in the firm's technology group. Other Qatalyst founders include Neil Chalasani, a vice-president from Evercore Partners (EVR); Brian Slingerland, a Goldman Sachs (GS) banker; and Brian Cayne, an associate from buyout firm Vista Equity Partners.

Quattrone will need the team's combined firepower as he tries to recover his golden touch after a years-long absence from finance and efface the tarnish of his indictment. Better to set up shop in California, where his dealmaking left an indelible mark on the tech landscape, Buyer says. "Generally speaking, most folks are glad to see him," she says. "It might be a tougher battle if he were setting up shop in New York."

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