End Game

Merrill Lynch beat the prosecutors’ wrath. It beat it, but not on the merits, and with some massive PR damage. The prosecutors just didn’t have a good enough case to throw anyone in jail. So the best they could do was exploit Merrill’s weakness—it had foolishly paid a client for moneys lost in corrupt research rather than fight it to the hilt—to craft a billion-dollar settlement that cleaned up the brokerage research departments around the Street.

Soon after, Citigroup’s stock unit Salomon Brothers beat the prosecutors’ wrath, too. Like Merrill, it beat it but not on the merits. The prosecutors wanted a new type of research paradigm, independent of meddling investment bankers, and Citigroup head Sandy Weill gave it to them when he hired research doyenne Sallie Krawcheck from Sanford Bernstein to run the department. Whether she is or not, people on Wall Street view her as too tough for the I-bankers to push around.

Now its First Boston’s turn on the firing line. And my sources claim there’s no beating the prosecution this time. The prosecutors were willing to look the other way with the wayward analysts at Merrill in order to get a settlement. They were happy drumming Salomon’s Jack Grubman out of the business—had he stayed, it’s doubtful anyone would have listened to his prognostications, especially after the trillions he lost you on bad telco picks.

But now both the New York State attorney general and the U.S. Attorney, Southern District of New York, are circling in on Credit Suisse First Boston, and I predict they won’t be appeased with process. I think they want scalps, most particularly the scalp of investment banker Frank Quattrone, who, like Mike Milken in a previous time, seemed too powerful to be reined in by the meddlesome ninnies in New York—everyone from compliance and in-house counsel to the bosses themselves, because they were making much less than he was. “Frank Quattrone is numero uno on our bad-guy list,” a source in one of the prosecution’s arms told me last week.

Holy cow, I thought when I heard this. Quattrone was at one time the most feared, most powerful investment banker on Wall Street. And that’s exactly what makes him such a juicy target.

“We are through with investigating analysts, who can all claim that they were riding the wave of the bull,” a prosecutor told me. “We have to throw in jail someone who did the pressuring.”

There’s no telling if the prosecutors will ultimately be able to build an airtight case against Quattrone, but one thing’s certain: Right now he’s in their crosshairs.

I’ve never met Quattrone. I know him only by reputation—he’s the guy who kicked off the whole IPO era, who brought Netscape and Amazon public. When TheStreet.com, my network of financial Websites, was coming public in 1999, we were wooed by just about every bank out there. Everyone wanted a piece of the action. Except Quattrone. He wanted all of the action. That’s right: He was willing to bring our company public but only if we shut out all the other bankers. Sole manager. I had never heard of such a thing, sole manager. Every deal has “co-’s.” But Quattrone was so powerful he could get away with it. (We ultimately went with Goldman, Hambrecht & Quist and Weisel Partners.) He was known to order up buys and sells on stocks depending upon how much business a firm did with his gang. He allegedly corrupted research in ways that would have been unheard of in previous times.

The prosecutors know the case against Quattrone for pressuring analysts into upgrading and downgrading stocks isn’t open-and-shut. But the prosecutors do have the e-mail trail. And the e-mail trail reads real bad for Quattrone, which is why he was recently placed on administrative leave.

“I suspect that sometime in the next few weeks, you’re going to see the first case that could land someone in jail for the crimes of the great bull market.”

Quattrone has insisted he is innocent. No kidding. They all do that.

But where First Boston is in trouble—and why I think Quattrone could go down—is that the company conducted an internal investigation last year that gave him a clean bill of health. Simply put, because CSFB’s internal investigation turned out to be flawed, the attorney-client privilege that protects the correspondence between Quattrone and the lawyers for the firm is no longer protected; the prosecution can see it in all its potentially glorious damnation.

On December 3, 2000, the First Boston general counsel sent out an e-mail telling Frank Quattrone that the government was launching an investigation into the IPO process and that all documents should be preserved. The next day, apparently, Quattrone endorsed a different strategy, one that urged destruction of all evidence.

Ugh. That’s precisely the chain of events that put Arthur Andersen out of business: a lawyer’s note to preserve followed by destruction of evidence. Open-and-shut.

My sense is that neither Eliot Spitzer nor James Comey, the U.S. prosecutor also looking into the matter, has any desire to indict First Boston itself for obstruction. Such an indictment would most likely wipe out Credit Suisse First Boston, because a brokerage house can’t survive a criminal indictment. Too many clients would obviously have to abstain from doing business with Credit Suisse if a criminal indictment came down.

But Gary Lynch, the former SEC enforcement lawyer who now runs legal at First Boston, knows that Spitzer or Comey, should they assemble their case, could order the indictment in a heartbeat if First Boston doesn’t play ball. So the firm is fully cooperating—and I mean fully cooperating, in the true sense of the words—in the investigation against its own main man.

Which is why I suspect that sometime in the next few weeks, you are going to see the first honest-to-Betsy case that could land someone in jail for the crimes of the great bull market. “We have no choice,” a prosecutor told me. “We have to put someone away.”

In other words, the prosecutors may or may not produce an indictment—but they sure as hell want to.

End Game