Frank Quattrone was always good at making deals. As a sizzling Silicon Valley investment banker during the tech boom of the 1990s, he orchestrated the initial public offerings (IPOs) of start-ups from Netscape to Amazon.com collecting as much as $120 million a year for himself in the process. Yet the deal he reached last week may well be the one he cherishes most. After 31/2 years of court dates, two criminal trials and the prospect of jail time, Quattrone struck a deal in which federal prosecutors agreed to all but drop charges that he obstructed justice during a 2000 investigation into how his employer handed out IPO shares of hot new companies.
The deal marks the end of a sorry chapter in American business history. While high-profile white-collar crime persists, the dramatic criminal cases that were launched just after the dotcom economy fizzled are now mostly completed. The icons of massive, turn-of-the-century corporate fraud–Ken Lay and Jeff Skilling of Enron, Bernie Ebbers of WorldCom, Dennis Kozlowski and Mark Swartz of Tyco–are convicted and, in Lay’s case, dead. Even Martha Stewart has served time. And many, if not most, of the cases the feds brought against smaller fish–to help assuage a share-owning public that had been scammed by phony accounting and overhyped stock–are resolved. The government claims that since mid-2002 it has won more than 1,000 corporate-fraud convictions, including those of more than 100 CEOs and presidents.
That’s not to say the system has been wholly reformed. Although Wall Streeters were genuinely terrified by the wrath of the prosecutors, they eventually flocked to other legal schemes–like hedge funds–with which to vastly overcompensate themselves. Prosecutors too are cutting their losses, and, as the public outrage subsides, moving on to new areas.
The Quattrone case symbolizes that shift. During the go-go bubble years, Quattrone was the go-to guy at Credit Suisse First Boston (now called Credit Suisse) for tech deals. After the government started looking into how bankers set aside shares of promising IPOs for favored clients and pressured analysts to issue rave reports about companies that often had no way of making money, Quattrone sent an e-mail reminding colleagues to “clean up” old files, per company policy. The Justice Department viewed that as obstruction of justice, since it had already started investigating IPOs involving Credit Suisse. One jury was divided on the issue. Another, in 2004, found Quattrone guilty, after which he was sentenced to 18 months in prison.
But that verdict was overturned last March by an appeals court that cited faulty jury instructions. (The trial judge didn’t explain that Quattrone would have had to know what he was doing was wrong to be convicted.) With their case, and perhaps their will, weakened, prosecutors waved a white flag and agreed to let Quattrone off–no fine, no admission of guilt, no ban from the securities industry–as long as he stays out of trouble for one year.
The evidence against Quattrone–who has all along proclaimed his innocence–was thin from the start, says Columbia University law professor John Coffee. But the prosecutors thought there was enough circumstantial evidence surrounding the e-mail to win a case. In the end the decision to drop the case echoes a broader trend to allocate resources to more timely issues. “You can’t focus on everything,” says Andrew Weissmann, former head of the Justice Department’s Enron task force, who is now in private practice. “There are a lot of other things to do.” For example: the backdating of stock options. More than 100 companies, from Home Depot to Apple, are being investigated for the way they handed out stock options to executives with issue dates earlier than the actual ones. (See box.)
There are still a few loose ends from the wave of prosecutions kicked off after the 2000 stock-market slump and the Enron meltdown. And some aren’t as easy to wrap up as Quattrone’s. Several British bankers, known in England as the NatWest Three, were hauled to Texas in July, after loud protests back home and a drawn-out extradition process. They face charges that they worked with ex-Enron CFO Andrew Fastow to siphon millions of dollars from a deal between their former employer, National Westminster Bank, and Enron. And in August, most of the convictions of four former Merrill Lynch executives, who stood accused of helping Enron inflate earnings by charading a loan as the sale of energy-producing barges, were overturned. An ex-Enron manager who was also convicted decided not to contest the decision. The government is expected to appeal the ruling on the four, which hinges on the interpretation of a controversial legal phrase.
Reversals like these often mark the true end of a contentious business cycle, as the legal system shakes out how old laws will apply to new crimes. The Supreme Court’s decision last year to overturn the conviction of accounting firm Arthur Andersen wasn’t without precedent. (Nor was it helpful: after the initial trial, Andersen had collapsed and some 28,000 U.S. employees lost their jobs.) Similarly, Charles Keating, one of the biggest nabs in the 1980s savings and loan scandal, saw his conviction reversed nearly five years after going to prison. And after the late-’80s insider-trading Wall Street sweep that, among other things, sent Michael Milken and Ivan Boesky to prison, a number of convictions were overturned, including that of onetime Boesky associate John Mulheren. “When you’re more aggressive, you’re going to wind up with more losses,” says Peter Henning, a law professor at Wayne State University.
And when it’s all over, you often end up with new laws, like the Sarbanes-Oxley reforms, which have made illegal much of the unsavory behavior of the go-go years. New laws aren’t retroactive, of course, and what was on the books didn’t seem sufficient to convict Quattrone. “I am very pleased that the case will be concluded,” he said, emerging from the courthouse last week. “I plan to resume my business career.” Northern California’s tech investors, many of whom wrote letters of support during Quattrone’s two trials, seem poised to embrace him. It is the clearest sign yet that while the world may have changed, it has also moved on.
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