Hurray for Frank Quattrone. It has to be said. The evidence seems to suggest that he was innocent. And even in the unlikely case that he was guilty, the prosecutor never made the case beyond a reasonable doubt, the standard for conviction for a crime. What wasn't a victory, though, was the media's role in this. Many reporters pandered to their audiences' desire to see a wealthy man take the fall because of the dotcom bust. All of this in due course. But first some background.
Frank Quattrone was a major investment banker in Silicon Valley who helped bring investors together with entrepreneurs. Realizing the huge value he was creating for his clients and for his company, Quattrone negotiated a special deal with his employer to cut himself in on a large percentage of that value. It was Quattrone who helped fund Amazon.com and Cisco.
When the dotcom boom ended in early 2000, various investors and government regulators were looking around for people to blame. There were many people who deserved blame, not least of whom were the investors who seemed to have forgotten that the price of a stock is the present value of its future earnings stream. Companies with negative earnings should have been valued at very low numbers or even zero unless they had realistic prospects of positive earnings in the future. But many investors were looking for others to blame. One obvious target was Quattrone, who had, in 1999, his best year, earned about $100 million.
On December 4, 2000, Quattrone was an employee of Credit Suisse First Boston (CSFB). At 6:20 p.m. that day, Richard Char, CSFB's Global Head of Execution - Technology Group, sent an e-mail to Quattrone and other CFSB employees. Here's the relevant section:
"With the recent tumble in stock prices, and many deals now trading below issue price, I understand the securities litigation bar is mounting an all out assault on broken tech IPOs. In the spirit of the end of the year (and the slow down in corporate finance work) you may want to send around a memo to all corporate finance bankers . . . reminding them of the CSFB document retention policy and suggesting that before they leave for the holidays, they should catch up on file cleanup. Today, it's administrative housekeeping. In January, it could be improper destruction of evidence."
Three minutes later, Quattrone replied, "You shouldn't make jokes like that on email!"
Another person who received Char's email (the head of West Coast Corporate Finance) suggested to Char that Char send an email under Char's name, the head's name, and the name of another senior officer. So at 8:13 p.m. that night, Char did so. Char's email stated:
"With the recent tumble in stock prices, and many deals now trading below issue price, I understand the securities litigation bar is expected to [sic] an all out assault on broken tech IPOs.
"In the spirit of the end of the year (and the slow down in corporate finance work), we want to reminding [sic] you of the CSFB document retention policy. The full policy can be found at [this intranet site]. The relevant text is:
"'For any securities offering, the Designated Member [of the deal team] should create a transaction file consisting of [items (i) through (v)].'
"So what does this mean? Generally speaking, if it is not (i) - (v), it should not be left in the file following completion of the transaction. That means no notes, no drafts, no valuation analysis, no copies of the roadshow, no markups, no selling memos, no IBC or EVC memos, no internal memos.
"Note that if a lawsuit is instituted, our normal document retention policy is suspended and any cleaning of files is prohibited under the CSFB guidelines (since it constitutes the destruction of evidence). We strongly suggest that before you leave for the holidays you should catch up on file cleaning."
Let's follow the moving parts here. Char, at the request of someone other than Quattrone, clarified his earlier email. He made clear that he was simply reminding people of the importance of following company policy and that company policy including suspending document retention policy if any lawsuit was instituted. So it appears that Char did nothing wrong, and so far Quattrone did nothing at all.
The next day, December 5, Quattrone sent an email to all recipients of Char's later email. Quattrone's email stated, "Having been a key witness in a securities litigation case in south texas (miniscribe) I strongly advise you to follow these procedures" and attached Char's later email. In other words Quattrone was seconding Char's advice to destroy emails before they could become evidence in a suit.
It was this email, along with his earlier email about joking, that led to Quattrone's being accused of obstruction of justice and witness tampering.
Quattrone's first trial ended in a hung jury in October 2003. His second trial ended with his conviction in May 2004. A federal appeals court overturned this conviction in March 2006. Those who want more details up to and including the May 2004 conviction should read Roger Donway's masterful piece of investigative reporting, "The Case for Frank Quattrone," Navigator, July/August 2004. Earlier this month, the prosecutor declined to try a third time. Quattrone is free.
Victory for Justice
Why was this a victory for justice? Because the prosecutor never made a good case against Quattrone. The prosecutor's argument was that Quattrone knew earlier than December 4 that he was under investigation for committing financial crimes and that he advocated destroying evidence that might have helped convict him. But all he did on December 4 was advocate people not tell jokes about serious things. Period. If you look at how we're treated in TSA lines at airports, you would think Quattrone would be a hero to the feds and to the media. In the TSA lines, jokes about the serious matter of hijacking can get you handcuffed. How someone can be accused of committing a crime for advising his colleagues not to make jokes about crime is beyond me.
It's true that on December 5, Quattrone did go beyond counseling against jokes and supported his colleague Richard Char's reminder about destroying emails. But even here all Quattrone was doing was reminding his colleagues about the potentially serious implications of not following the company's standard procedure. What he advocated doing was not clearly illegal. To see why, consider the email discussion that had occurred on December 3 between Quattrone and CSFB's general counsel, David Brodsky.
Brodsky to Quattrone: "As you may know, there's been an inquiry going on by both the SEC and NASD into our allocation process in the IPO market."
Quattrone to Brodsky (paraphrased): Email me some details of your concerns.
Brodsky to Quattrone: "Briefly, and this should absolutely not be passed on to anyone else, we have received Federal Grand Jury subpoenas asking for testimony and documents about the IPO allocation process from the firm."
Quattrone to Brodsky: "Are the regulators accusing us of criminal activity?"
Brodsky to Quattrone: "They are not formally accusing us or individuals yet, but they are investigating because they think something bad happened. They are completely wrong but merely being investigated and having something leak could be quite harmful, so the idea is to get them to back off their inquiry, we educate them as to the entire IPO process, including the allocation issues and criteria and urge them to back off."
Just three minutes later, Brodsky wrote another email to Quattrone: "But please do not under any circumstances discuss these facts with anyone—however innocently—because everything we say now is going to come under a microscope. I know these people and how they work and I am controlling the flow of information on an extremely tight need to know basis."
Again, let's follow the moving parts. Quattrone asked if the regulators were accusing "us" of a crime. Brodsky, the company's chief lawyer, answered that they weren't. That's relevant to the document retention policy; Brodsky's answer suggests that there's no reason not to destroy documents. Moreover, Brodsky assures Quattrone that he, Brodsky, can explain to the feds what goes on within the firm so that the feds will back off. Finally, Brodsky tells Quattrone not to discuss the case with anyone. So if Quattrone suddenly told people not to follow the usual document destruction policy, this would be tantamount to discussing the case.
As Roger Donway wrote in 2004:
"From this, I conclude that Quattrone did not know that the inquiry about which Brodsky had informed him required suspension of the company's document-retention policy. How could it, if Brodsky (who Quattrone surely assumed would know what he is doing) had not told many people about the investigation and had ordered Quattrone not to tell them? Not only was Brodsky not telling Quattrone to suspend CSFB's document-retention policy (which Quattrone must have assumed he would do if it were required), Brodsky had actually issued a gag order that made it practically impossible for Quattrone to order the policy suspended."
Now it turns out that CSFB should have suspended its policy on document retention. CFSB's very own policy was more nuanced than Quattrone or Char understood. It stated: "No document may be destroyed if (i) CSFB has been made a party to litigation involving such transaction or has received a subpoena which calls for the production of such documents or (ii) it is reasonably likely that litigation may be commenced in connection with such transaction of any matter relating to CSFB's involvement therein." The problem is that Brodsky had told Quattrone that subpoenas had been issued. This required suspension of the standard document-retention policy. But was it Quattrone's responsibility to suspend this policy? It's hard to see why.
Moreover, to establish that a crime is committed, a prosecutor must establish criminal intent. Did Quattrone mean to frustrate the SEC's investigation? It seems unlikely. Otherwise, why would he have been so careful to ask if there were criminal charges? Quattrone's emphasis, given the litigiousness in the Silicon Valley, seemed to be on avoiding civil suits.
Finally, if Quattrone was really trying to obstruct justice, he was the laziest obstructer of justice I've ever heard of. After all, he did not originate the memo that reminded employees of the document-retention policy. You might argue that he had a previous private conversation in which he asked Char to send such a memo. But this is a stretch. Moreover, if he had had such a conversation, then would he have castigated Char publicly for misplaced humor rather than doing so privately? And if he really wanted Char to look like the initiator, wouldn't he have wordsmithed Char's email in advance so that it didn't make jokes about such serious things? This all reminds me of what one of my doctor used to say when I would get afraid that some pain in my chest was a sign of a heart attack rather than gas pains: "When you hear hoofs, think horses, not zebras." This is the modern doctor's version of Occam's Razor: the simplest explanation is likely to be the right one. And the simplest explanation is that Char was doing what we saw as his job, with no heads-up (and the prosecutor never even claimed one) about a subpoena and that Quattrone was exercising prudence in destroying documents that devious litigants might later want.
No Victory for the Media
Consider how Quattrone's hometown newspaper, the San Jose Mercury News, reported the recent news that the prosecutor had declined to prosecute Quattrone a third time. Here's the first paragraph from a news story, "Analysis: Quattrone's Amazing Escape," (August 23, 2020) by the Mercury's Scott Duke Harris:
"It's taken 3 1/2 years, but Frank Quattrone has extricated himself from both regulatory shackles and a criminal conviction that once seemed likely to end to his brilliant if controversial career in disgrace. Houdini would have been impressed."
Houdini would have been impressed? Houdini extricated himself from amazing situations -- being tied up in a box and then dropped underneath the water, for example. Quattrone, by contrast, simply asserted his innocence and stuck with it. How does that make him like Houdini? There is only one interpretation I can think of, and Harris is vague about whether he meant this interpretation: namely, that once the feds target a businessman, no matter how innocent he is, and put lots of resources into prosecuting him, he will be convicted. If that's what he meant, the rest of article didn't clearly show it.
Or how about the Wall Street Journal, which used to advertise itself as "the daily diary of the American dream?" The editorial page, on which analysis of so-called financial crimes is about the best in the business, had an excellent, if brief, editorial celebrating the outcome. (See "Quattrone Walks," Wall Street Journal, August 23.) But that same day's front-page story, "Quattrone Deal Drops All Charges, Allows His Return to Wall Street," the one that a much higher percentage of readers is likely to read, though factually correct, subtly undercut Quattrone. The first sentence begins, "Frank Quattrone, the one-time investment-banking kingpin of Silicon Valley." Note the use of the work "kingpin." Does that sound familiar? Where else have you seen it? Whenever a major dealer in illegal drugs is caught. Do you ever see Senator Ted Kennedy referred to as a political "kingpin?" The choice of language shows the subtle anti-business bias of the reporters.
Wouldn't it be nice if the reporters could be as fair-minded toward businessmen pursuing profit as they are toward people charged with murder?
David R. Henderson, a research fellow with the Hoover Institution and an economics professor at the Naval Postgraduate School in Monterey, Calif., is author of The Joy of Freedom: An Economist's Odyssey and co-author of Making Great Decisions in Business and Life (Chicago Park Press, 2006).