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Prominent tech banker in dubious spotlight

Technology investment banker Frank Quattrone's future is uncertain as regulators investigate Credit Suisse First Boston and other institutions for IPO allocation abuse.

A management shake-up at Credit Suisse First Boston has put a bright spotlight on one of Silicon Valley's most famous investment bankers, prodigal billionaire Frank Quattrone.

On July 12, CSFB Chief Executive Allen Wheat resigned, and some Wall Street insiders interpreted it as a signal that the company was trying to clear its name with regulators. The U.S. attorney general's office, the Securities and Exchange Commission and the National Association of Securities Dealers have each announced investigations into CSFB's IPO allocation practices in recent months.

Although no regulators have specifically named Quattrone as a target of an investigation, some Wall Street veterans say the probes could spark his resignation. Others insist Quattrone's standing at CSFB is secure because he is surrounded by a cadre of faithful executives. And his allies say the uncomfortable spotlight from investigators will soon fade.

Quattrone heads CSFB's Palo Alto, Calif.-based technology group and was one of the most influential investment bankers during the technology stock bubble of the late 1990s. It is difficult to overstate the importance of Quattrone's position at CSFB and his skill at elevating the status of technology IPOs in the broader investment community.

"I don't think there was any one person who caused the bubble, but he was certainly a very important rainmaker--possibly the most important rainmaker in technology and investment banking in the last five years," said Jay Ritter, professor of finance at the University of Florida in Gainesville, Fla.

As investigations continue, senior CSFB executives have been putting heat on executives involved in IPOs. Several brokers were put on administrative leave in early April, and they were terminated in June. Each was linked to the IPO business, though they were not responsible for IPO allocations.

After Wheat's departure earlier this month, CSFB directors immediately replaced him with John Mack, arguably the world's most famous investment banker. Dubbed "Mack the Knife" for his reputation as an aggressive cost cutter at Morgan Stanley, Mack is worth roughly $600 million and came out of retirement after four months to take the CSFB job.

It is highly unusual for a bank's directors to tap an outsider to spearhead a restructuring. Mack left Morgan Stanley earlier this year after a power struggle pitting him against Philip Purcell, the former head of Dean Witter, who took the top spot.

Wall Street is buzzing with rumors that Mack may fire several senior managers, including Quattrone, a move that could have ripple effects throughout Silicon Valley and the technology sector. Neither Quattrone nor other CSFB executives would comment on the record regarding his job security, but several Wall Street insiders say his position is tenuous.

"If the external legal problems get out of control, you can bet that heads will roll," said one Wall Street analyst, a 20-year veteran who, like other sources, requested anonymity when speaking of Quattrone.

"CSFB will gnaw off its arm to get out of the trap," he said, referring to the possibility of firing Quattrone to clean up CSFB's reputation. "They'll have no choice."

A kingdom in the Valley
Since the mid-1990s, Quattrone has been one of the most colorful people in the usually drab world of investment banking. He left Morgan Stanley in 1996 over a high-profile pay dispute and defected to Deutsche Bank of Germany. In 1998, CSFB hired him to lead a division in charge of underwriting emerging technology companies.

By the late 1990s, the technology group was a lucrative and semi-autonomous division that put CSFB in the vanguard of the technology boom. At its peak, the division was larger than many independent banks, and Quattrone sat at its helm.

CSFB gave Quattrone broad powers to run the technology practice out of a Palo Alto office that many observers referred to as "Frank's fiefdom." Technology group members received a cut of revenue for deals they generated for CSFB. In addition to banking fees, members received commissions from trading.

Quattrone's division became known for its opulence--even in an industry known for over-the-top abundance and luxurious wooing of potential clients. The group transported customers in a jet used by Bob Dylan. Even as late as May of this year, CSFB Technology Research hosted a three-day European conference in Barcelona, Spain, that--according to the Financial Times of London--included a flotilla of yachts.

But in late 2000, after the spring stock market crash and a sustained drubbing of technology stocks, CSFB began attracting regulatory investigations that eventually sparked the recent leadership change. The SEC investigation was part of a much broader inquiry into IPO issues, which spread to all investment banks that participated in technology IPOs in the late 1990s.

Regulators are still trying to determine whether any bankers took inflated commissions--even kickbacks--from investors in return for early access to technology shares. To date, no one has been indicted in the investigation. Regulators would not comment on the pending investigations.

CSFB, which was one of the leading investment banks for IPOs by volume in 2000, is at the center of the industrywide probe. Quattrone, who led the technology offerings, has taken heat on Wall Street and in the financial press for the allegations--though no investigations are focused on him specifically.

"I'd be surprised to hear that someone actually said, 'If you do this, I'd do this in return,' but it became known that if you did an IPO with his group, there'd be a good chance he'd make sure a brokerage account was opened for you that would get preferential allocation of IPOs," Ritter said of Quattrone. "The term 'friend of Frank' sprung up for some of this back-scratching that was going on."

In June, as the regulatory investigations heated up, CSFB fired three brokers who reported to Quattrone and Andrew Benjamin, head of private client services, claiming that the brokers put pressure on hedge funds to pay inflated commissions in exchange for allocations. Prompted by a lengthy internal investigation, the firings were seen on Wall Street as CSFB's most serious admission of possible impropriety in the way it handled IPOs.

Sign of the times
Quattrone's potential departure from CSFB would symbolize a dramatic lowering of fortunes of the technology sector, already battered by a year and a half of slumping earnings and dented stocks. In statements to the financial media in the United States and Europe, Mack has said his restructuring will focus on "teamwork"--possibly implying that he may rein in disparate fiefdoms of the CSFB empire, including, if necessary, the technology group.

Some Wall Street analysts at rival investment banks say Quattrone's departure is imminent, and the management coup harks back to the Treasury trading scandal at Salomon Brothers a decade ago. In 1991, Warren Buffett, Salomon's leading shareholder, demanded the resignation of John Gutfreund and brought in a team of new executives who tightened controls.

But others say Quattrone--though clearly in an awkward position--is not about to fall under Mack's ax. The two are both Morgan Stanley alums and respected figures in the investment banking community.

"These two guys need each other," the Wall Street veteran said. "Where would Quattrone go, and who would hire him now with all these issues hanging over his head? From Mack's perspective, why would you want to get rid of him and this division now, when the market, presumably, is at its all-time bottom? It doesn't make any sense."

Firing Quattrone could also erode morale at CSFB, where the mood has deteriorated under pressure of regulatory investigations. In part to preserve morale and stem potential defections, one CSFB employee said under the condition of anonymity, Mack is probably loath to fire Quattrone.

"The people that work here are intensely loyal to Frank and everything he's done here," the CSFB employee said. "Take a look at what he's done over his career. Everywhere he's gone, he's been a winner, one of the best investment banking guys that's ever lived...There are all kinds of rumors going around right now, but I haven't heard or seen anything that would indicate he did anything illegal. Nothing."

Staff writer Larry Barrett contributed to this report.