"Recent investigations into conflicts of interest on Wall Street have shown that in too many cases in the past, investors' interests were compromised for greater investment banking revenues," said Mary L. Schapiro, NASD's Vice Chairman and President of Regulatory Policy and Oversight. "In restoring integrity to our markets and investor confidence in our industry, it is absolutely necessary that we hold individuals responsible for these abuses accountable. Institutions can only act through people and when individuals violate our rules, enforcement actions with meaningful sanctions must follow."
The first of the two complaints filed today alleges the following:
When Quattrone joined CSFB in 1998, he was already an established investment-banking star. At CSFB, Quattrone continued to play a dominant role in the business of underwriting new issues for technology companies. Quattrone created what amounted to a firm-within-a-firm at CSFB, bringing with him dozens of colleagues and associates and fashioning an organizational structure under which research analysts, investment bankers, and brokers all reported to him. This structure was enormously successful. In 1999, CSFB managed more U.S. IPOs than any other firm. In 2000, investment banking was the firm's second largest revenue source, generating $3.68 billion, a 60 percent increase over the year before. Quattrone's profited substantially as well. Between August of 1998 and the end of 2001, he personally received compensation of over $200 million.
One way Quattrone's Tech Group sought to win and retain investment-banking business was by "spinning" IPO shares, for example, giving access to hot IPOs to select corporate executives who could influence their employers' choice of investment bankers. Spinning took a uniquely aggressive form in the Tech Group. In making presentations to prospective investment banking clients, the Tech Group held out access to IPO shares as an inducement to the prospective client's officials. The group also identified "strategic" technology company insiders and ranked them according to their perceived ability to influence their companies' choice of investment bankers. At its peak, there were over 300 accounts popularly known as "Friends of Frank" accounts. Through managed discretionary trading accounts, the Tech Group allocated IPO shares to such individuals and, in aftermarket trading, flipped shares back to CSFB, producing substantial profits for the owners of the accounts. To prevent dilution of the IPO profits, the Tech Group discouraged the owners from trading in the accounts themselves. To ensure that the owners knew how much money was being made for them, the group sent them monthly unofficial performance reports enumerating realized and unrealized gains and rates of return. The unofficial report on one such account reflected total gains of more than $1.3 million and a rate of return of nearly 58,000 percent over a 19-month time period. Because dispensing such profits to tech company insiders was tantamount to giving them cash gifts, the practice violated NASD gifts and gratuities rules.
Another way the Tech Group sought to obtain business was by holding out to prospective clients the prospect of CSFB's issuing favorable research about them. Tech Group research analysts actively participated in soliciting investment-banking business. "Pitch books" used in presentations to prospective clients included excerpts from favorable research reports prepared by Tech Group analysts for other CSFB client companies. Quattrone created a powerful incentive for analysts to initiate and maintain positive coverage on investment banking clients by linking their compensation to investment banking revenue and encouraging investment bankers to participate in analysts' performance evaluations. He also allowed issuers to review and comment on draft research reports, including proposed recommendations and price targets. These practices compromised the independence and objectivity of the Tech Group's analysts.
By creating the inherently flawed reporting and supervisory structure under which these improper practices flourished, and by allowing and endorsing these practices, Quattrone violated NASD rules.
This action grew out of the coordinated research analyst investigations led by the SEC and conducted by NASD in conjunction with the NYSE and other regulators.
In the second complaint filed today, NASD charged Quattrone with failing to appear for investigative testimony before NASD. The expected testimony was to cover a number of subjects including whether Quattrone encouraged CSFB employees in the Tech Group to destroy documents after being notified of NASD and federal investigations. Quattrone was notified as early as June 2000 that NASD was investigating CSFB's IPO allocation practices, and was specifically counseled then not to alter or destroy documents. In September 2000, Quattrone was advised of an SEC investigation and on December 3, 2000, he was notified of a federal grand jury investigation of those same practices. Yet on December 5, 2000, Quattrone sent an e-mail to Tech Group employees encouraging them to cleanse their files. In January 2002, CSFB settled charges relating to this IPO profit sharing investigation, paying NASD and the SEC $100 million.
Under NASD rules, a firm or individual named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible remedies include a fine, censure, suspension, or bar from the securities industry, disgorgement of gains associated with the violations, and payment of restitution.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD's Web Site at www.nasd.com.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web Site at www.nasd.com.
