V: The Scam Continues...Plenty of Corruption inside The Houses...fyi..
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Two Staffers Are Put on Leave At CSFB Amid Probe of IPOs
By Susan Pulliam and Randall Smith
Staff Reporters of The Wall Street Journal
April 20, 2001
<<Two senior employees in the technology group at Credit Suisse First Boston have been placed on administrative leave by the securities firm as a federal probe advances into how Wall Street has awarded hot initial public offerings of stock to customers, according to people familiar with the move.
John Schmidt, a top manager in the group, and Michael Grunwald, who reports to him, began the leaves a few weeks ago, the same people said. Their jobs involve catering to wealthy clients of technology banking superstar Frank Quattrone. The leaves are related to the probe, the people said.
The action by the unit of Zurich-based Credit Suisse Group is the first concrete sign that the probe includes the technology business run by Mr. Quattrone, one of the most powerful and highest-paid investment bankers at any Wall Street firm.
As reported, the Securities and Exchange Commission and the U.S. attorney's office in Manhattan are investigating whether some investors who received shares in hot IPOs paid unusually large commissions on other stock trades, and whether those payments constituted illegal kickbacks. The probes extend to various Wall Street firms. The regulatory arm of the National Association of Securities Dealers is also probing some of the same issues. Both Mr. Schmidt and Mr. Grunwald were involved in handing out shares of hot new issues as part of their jobs in the technology banking group.
One early focus of the investigations has been the big investment bank Credit Suisse First Boston, which under Mr. Quattrone's leadership gained a sizable share of the once-sizzling market for high-tech IPOs, many of which soared more than 100% in price on their first trading day, during a market mania for Internet stocks that began in late 1998 and lasted into the spring of 2000.
Credit Suisse First Boston's hiring of Mr. Quattrone and a group of bankers, analysts and support staff in mid-1998, from the Deutsche Morgan Grenfell unit of Deutsche Bank AG, helped catapult CSFB into the top ranks among Wall Street firms. CSFB more than doubled its share of equity underwriting to 8.6% in 1999 from 3.8% in 1998, boosting its rank to No. 4 from No. 8, according to Thomson Financial.
The firm's stock-underwriting fees more than tripled to $686 million in 1999 from $203 million in 1998; in technology-stock issues, the firm soared to No. 3 in 1999 from No. 12 in 1997. Because he brought in so much business for CSFB, Mr. Quattrone's annual pay has been estimated at well above $20 million, according to people familiar with the firm.
The Credit Suisse unit has previously confirmed receiving requests from U.S. government authorities for information about IPO allocations, while defending its procedures as consistent with industry practice. Asked about the leaves taken by Messrs. Schmidt and Grunwald, a spokesman for CSFB said, "We don't comment on internal employee matters." He wouldn't elaborate.
In a statement, Mr. Schmidt's attorney, Richard Marmaro of the law firm of Proskauer Rose LLP, said, "We firmly believe that John's conduct as part of CSFB's private-client-services tech group was at all times appropriate, ethical and above-board." Mr. Grunwald couldn't be reached for comment. His lawyer, Brad Brian of Munger, Tolles & Olson LLP, said he had only been retained last week and couldn't comment. Mr. Quattrone declined to comment.
The Quattrone group had unusual autonomy, operating as a "firm within a firm" in the CSFB organization, according to people on Wall Street. It had its own revenue-sharing agreement with CSFB. And, in an unusual arrangement for Wall Street, the technology group's research analysts reported both to executives in the Quattrone group, based in Palo Alto, Calif., as well as to CSFB's senior research executives in New York.
The technology group likewise has had its own private-client services group, a team of high-level stockbrokers led by Mr. Schmidt who also reported jointly to Mr. Quattrone and CSFB executives in New York. The California group caters to clients such as the senior executives of technology companies, venture-capital executives and other business associates of Mr. Quattrone. Their clients also include many hedge funds, which are trading partnerships for wealthy investors.
The technology private-client group typically got its own slug of IPO shares to allocate among its clients, according to former employees of the group. However, while the latest development involves members of Mr. Quattrone's group, the investigations continue to look into the activities of the New York operations of CSFB, which manages IPO allocations and includes equity syndicate executives, institutional sales executives and traders.
Mr. Schmidt, who works in San Francisco and reports directly to Mr. Quattrone, has overseen the tech group's private-client services department at CSFB. His title is listed on the CSFB Web site as managing director, technology client services. He and Mr. Grunwald are being paid while on leave.
Mr. Schmidt, 54 years old, is a securities-industry veteran. He served as deputy assistant secretary of the Treasury for debt management in the Carter administration, later becoming a regional manager for institutional sales at CSFB, then known as First Boston Corp., from 1981 to 1994. After a stint at Lehman Brothers Inc. from 1994 to 1997, he joined the Quattrone group, then at Deutsche Morgan Grenfell. He was also a governor of the NASD board from 1993 to 1996 and chairman of the Western District of the Securities Industry Association in 1991.
Mr. Schmidt's attorney, Mr. Marmaro, referred questions about the reasons for the leave to CSFB, and declined to discuss the investigation in detail except to say that Mr. Schmidt didn't engage in "profit-sharing" of IPOs. According to people familiar with the probes, such profit sharing -- in which some investors agreed to share their IPO profits with some Wall Street firms in order to boost their allocations of hot issues -- is one of the issues being examined. Although Mr. Marmaro said Mr. Schmidt hasn't spoken with the agencies conducting the probes, the lawyer wouldn't say whether the agencies have sought to question him.
Mr. Grunwald, who graduated in 1988 from Colorado State University, worked successively in the 1990s at Trammell Crow Co., a Dallas real-estate company; Andersen Consulting in San Francisco; Morgan Stanley & Co.; Osprey Partners LLC in Greenwich, Conn.; and Lehman Brothers , before joining CSFB in October 1999. He reports to Mr. Schmidt, and is a longtime personal friend of Bill Brady, one of Mr. Quattrone's two top aides. Mr. Brady is head of global technology corporate finance.
In the CSFB technology group, Mr. Grunwald's job has included handling cash-management chores for high-tech companies that are CSFB clients, duties that put him in close touch with senior executives of technology-company clients. In the group, he was considered the point man for many of those client relationships, according to people familiar with the firm.
Meanwhile, the regulatory unit of the NASD could bring its own enforcement actions against Wall Street firms and their employees, apart from the probes of the SEC and U.S. attorney in Manhattan. At a seminar on securities enforcement held by the New York law firm of Schulte Roth & Zabel LLP on March 4, Barry Goldsmith, executive vice president for enforcement at NASD Regulation Inc., said his agency has "concerns about sales and pricing practices" related to IPOs. NASDR wouldn't confirm or deny any probe.
Deborah Meshulam, a former SEC lawyer now at the firm Piper Marbury Rudnick & Wolfe in Washington, said that while the SEC has broad authority to investigate fraud or manipulation in IPOs, the NASD has its own separate rules requiring brokers and dealers to observe standards of fair practice and conduct. The NASD also has a number of rules that specifically govern IPO allocations, she added.
Daniel J. Kramer, a partner at the Schulte Roth firm, said one rule that could apply is the NASD's "Free-Riding and Withholding" rule, which requires that IPOs be fully distributed, meaning dealers must sell all the shares in the issue and can't retain an equity interest in the company issuing the stock.
Requiring customers to return a prearranged percentage of their IPO profits to their brokers could violate that rule, some Wall Street executives have said. From the SEC's point of view, lawyers say, such profit-sharing arrangements could also amount to undisclosed underwriters' compensation.
In December, the SEC issued subpoenas to several major securities firms seeking data on which investors received shares of IPOs in 1999 and 2000, as well as which investors paid commissions of more than 10 cents a share on trades of 10,000 shares or more. In January, the U.S. attorney for the Southern District of New York issued subpoenas to the same firms, seeking the same data.
Among the recipients of the latest round of subpoenas from the U.S. attorney's office were many of the top firms on Wall Street, including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Bear Stearns Cos. and the UBS Warburg unit of UBS AG, according to people familiar with those firms.
It couldn't be determined whether two other firms that led numerous IPOs by high-tech companies -- the Robertson Stephens unit of FleetBoston Financial Corp. and the Deutsche Banc Alex. Brown unit of Deutsche Bank AG -- received the same subpoenas.>> |
