What Tony Bruan Should Tell IPO Investigators: Michael Lewis
2001-07-12 02:33 (New York)
What Tony Bruan Should Tell IPO Investigators: Michael Lewis
(Michael Lewis, author of ``Liar's Poker'' and ``The New New
Thing,'' is a columnist for Bloomberg News. His new book,
``Next,'' will be published this month. The opinions expressed are
his own.)
New York, July 12 (Bloomberg) -- This week brought the news
of Anthony Bruan, the head of an investment firm I'd never heard
of called PTJP Partners LP. PTJP now finds itself at the center of
a potentially huge scandal. According to at least five former
employees, traders at the firm in effect bribed virtually every
big Wall Street firm for shares in Internet companies at the
initial offering price.
The payoffs took the form of higher-than-usual commission
rates on other trades, or agreements to buy shares in the less
appealing companies peddled by the Wall Street firms. By one
estimate Bruan -- who goes by ``Tony,'' enjoys expensive cars,
likes showing off his ability to do push-ups, and is friendly with
the actor who plays mafia henchman ``Paulie Walnuts'' on ``The
Sopranos'' -- ran a business where some traders kicked back to
Wall Street as much as half of what they made from the Internet
IPOs.
The apparent moral of the story is that it is wrong to bribe
your way into Internet IPOs. The actual moral of the story is
that, during a financial bust, it is unwise to be a) obviously
rolling in profits from the preceding boom, b) unendowed with
higher education and c) unsheltered from public ridicule by one of
the snootier Wall Street firms.
Two years ago, the whole society was caught up in a very
obvious racket called Internet IPOs. Everyone who played the game
knew exactly how it worked. Now the exact same group of people are
busy convincing themselves they are disgusted with what happened.
Filling a Need
Two years ago, no one was innocent. Now everyone is, except
for a handful of soon-to-be Wall Street outcasts. And so, at this
moment, there is a pressing social need to find people like Tony
Bruan to string up. If Tony Bruan didn't exist, a firm like
Goldman Sachs Group Inc. would have to invent him.
But the interesting question is not: Did Tony Bruan bribe
Morgan Stanley & Co., Goldman Sachs, Lehman Brothers et al? The
interesting question is: Why did Morgan Stanley, Goldman Sachs, et
al price Internet deals so cheaply that investors like Bruan would
be compelled to bribe their way into them?
Why would a sane, honest investment bank sell shares in a
company for $8 that everyone knew would rise to $30 at the end of
the first day of trading? Why not sell the shares for $30? After
all, the new Internet company would only benefit from the cheaper
capital.
Of course you already know the answer to that one. Internet
IPOs were underpriced because the Internet companies agreed to
allow their shares to be underpriced.
Price of Entry
They did this in turn because a) the officers of the company
could make more money on stock options struck at the discounted
IPO price than at the fair market price, b) underpricing your
shares was the price of entry into the lucrative game and c)
people believed, or wanted to believe, that the publicity of the
stock shooting through the roof on the first day of trading was
worth more than the cost of selling the shares cheaply.
The added cost of capital might have been a concern to a long-
term investor. But there were no long-term investors, so the cost
of capital was irrelevant.
Everyone knew that -- just as everyone also knew that the
success of Internet IPOs depended on an elaborate system of bribes
and kickbacks. The analysts were bribed to endorse the companies -
- a bribe they took in the relatively genteel form of enormous
year-end bonuses.
Others who might help generate favorable public opinion
around the company -- venture capitalists, prominent
entrepreneurs, at least one business journalist -- were included
on the ``friends and family list,'' which enabled them, like Tony
Bruan, to buy shares at the offering price. The investment banks,
dissatisfied with their fees, and unhappy to see big investors
making off with the lion's share of the gains, demanded tribute
from investors in exchange for shares at the offering.
A Challenge
So if I were Tony Bruan, I would take my Bentley down to Wall
Street and hold a press conference beneath the statue of George
Washington.
Straddling my hood ornament and flanked by Paulie Walnuts, I
would issue a challenge to the many U.S. government employees who
are now hunting for financial scalps.
I'd say: Take any Internet deal after mid-1998. Go ahead:
Name the cleanest deal you can think of. Assign a team of young,
hungry federal investigators to examine the list of friends and
family members let into the deal, plus the allocation of shares at
the IPO price to big institutions.
Let them examine the pattern of institutional trading in the
after-market, the analysts' recommendations, and the investment
banking fees they attracted. If they find even one deal that was
clean, I'll tell you everything you want to know and more.
But you know what? You'll never do it. You don't have the
guts for it. Because, deep down, you know what you'd find: No one
is clean. Every one of these deals was born dirty. Nice guys
didn't get a piece of them. You got a piece of these deals because
in some way you paid off the people who brought them to market.
Goldman, Morgan -- those guys want to think they're high
class and I'm no class. It's true I didn't go to some fancy
college. I didn't graduate from any college. I enjoy my life, at
times maybe too much. But at bottom, them and me, we're no
different.
--Michael Lewis in Paris through the New York newsroom
(212) 318-2300 or at mlewis1@bloomberg.net/br/mbb
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-0- (BN ) Jul/12/2001 6:33 GMT |
