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Scapegoat Sues


Editor’s Note:This post originally appeared as a news story in The New York Post.

There may be no better way of demonstrating Credit Suisse First Boston banker Frank Quattrone’s skill than a look back at the deal his boss, CSFB CEO John Mack, cut with the U.S. government.

It could never happen now with New York Attorney General Eliot Spitzer hot on the trail of Wall Street conflicts of interest.

The settlement looks better every time you glance back at it. Crafted when attention was focused on the war in Afghanistan, not on the Internet stock bubble, the settlement called for CSFB to pay a $100 million penalty to the Securities and Exchange Commission to settle allegations that it charged higher than normal commission for hot IPO stocks.

After some hand-wringing – the release of a settlement document with lots of juicy anecdotes – the SEC pronounced itself satisfied. At about the same time a criminal investigation against the bank was dropped.

But maybe CSFB didn’t make such a clear-cut getaway. Former CSFB stock broker Mike Grunwald filed suit against his former employer, challenging the way in which he was fired, and is now headed for a hearing in front of the National Association of Securities Dealers.

“Grunwald’s termination was actually the product of CSFB’s plan and desire to designate a ‘scapegoat’ in response to a flurry of regulatory and criminal investigations directed at CSFB’s widespread practices in connection with allocations of shares of initial public offerings to CSFB’s hedge fund and other customers,” his suit alleges.

Grunwald was one of the brokers who was fired during the SEC investigation for violating what CSFB said was bank policy in demanding higher commissions for hot IPO issues. His boss John Schmidt also got the boot and, according to banker talk, may be suing on similar grounds. In addition to bearing the brunt of the blame for the commission scheme, Schmidt and Grunwald appeared as brokers of record on the “Friend of Frank” brokerage accounts, special IPO accounts made available to Silicon Valley CEOs.

When it settled with the SEC – and it could still settle privately with the former brokers – CSFB paid a hefty fine. But with an estimated $700 million in profits from IPO issues during the height of the bubble, the $100 million penalty works out to a mere 14 percent, about the size of a restaurant tip.

Schmidt and Grunwald got canned, Quattrone became a member of CSFB’s executive committee and got to circulate a congratulatory e-mail to his Silicon Valley friends and clients, touting his value to the bank. His colleague, George Boutros, who was said to be thinking of leaving the bank starting his own tech merger practice, was recently named co-head of CSFB’s global mergers division.
Some say that’s an outrage. “No one was more egregious in taking advantage of the bubble,” said a former analyst who now runs a hedge fund and thinks that CSFB’s tech banking group should have been punished more severely. “People are up in arms about it.”

Those sentiments are formally expressed in the complaint that Grunwald filed. It’s easy to dismiss Grunwald’s allegations as those of a disgruntled employee. Certainly, that’s what CSFB would like. But for those who know something about CSFB, his claims bear some weight. Grunwald was a protégé of Quattrone’s No. 2, banker Bill Brady. Grunwald was a close friend of Brady’s, living in a Telegraph Hill building owned by the more senior banker.

Grunwald’s complaint says that CSFB’s high commission structure was institutionalized at the bank and described to Grunwald by supervisors at the bank’s New York office as common, established Wall Street practice. To support this claim, he offers a stack of e-mail messages between brokers and supervisors, detailing funds’ profits and the extra commissions the bank was receiving. Some brokers even kept spreadsheets on fund profits to compare them to the extra commissions, he alleges.

Grunwald, who was paid a base salary of $1.5 million against his commissions, describes the bank’s attitude as very straightforward: Since hedge fund and other customers were certain to make money – lots of money – when they flipped their IPO stock, CSFB wanted a cut for providing that very desirable service.

CSFB says none of this is true. “We believe the allegations in the arbitration claim have no merit,” the bank said in its formal statement. “And we will vigorously defend against them.”

Share  Posted by Chris Nolan at 9:40 PM | Permalink

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