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Dot-com Meltdown Popped High-Fliers’ IPO Bubble

Mar
7
2003

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

The market changed. The banks didn’t.

That’s one way to look at what’s happened to former Credit Suisse First Boston tech star Frank Quattrone, now accused of enriching his friends, himself and his banking associates at the expense of the investing public.

But the market – all those people who didn’t and still don’t know that “hold” really means “sell” – helped Quattrone in ways that few wanted to realize. They wanted to buy stock. Their demand sent prices up.

In the two years since word of the “friend of Frank” accounts was first reported by The Post, there’s been a lot of talk in Silicon Valley about whether such accounts were illegal. IPO allocations were given by all the banks for all sorts of reasons, but mostly for the one Silicon Valley understands best – to do more business.

“Bring ‘em on, bring ‘em all on, from all the banks,” says a Quattrone defender. “There’s nothing wrong with allocations.”
That’s a legitimate and fair observation – one first made by Quattrone’s former employer, Credit Suisse First Boston, when Quattrone’s behavior first caught regulators’ eyes. But times have changed.

And while Silicon Valley and Quattrone may not realize it, the banks do.

Finally, IPO allocations like “friend of Frank” accounts will be banned under the agreement New York Attorney General Eliot Spitzer has worked out. “Friends and family” allocations have been abandoned.

Spitzer made the banks see they must play by new rules. When Wall Street was a cozy club of men who all knew one another – and knew one another well – IPO allocations and “friends and family” shares were all fine.

Insiders knew of the accounts, and the amounts that were often made on them weren’t anything to get excited about. Sometimes, shares even fell in price. People lost money.

But starting in mid-1998, the Netscape phenomenon took hold. Everyone who bought a tech stock thought he was buying the next sure big thing. Prices went up. So they bought and bought again.

Few realized that Netscape was the revolution. Pretty much everything after that was pets.com – a company that would FedEx dog food to your house so you didn’t have to drive to the grocery store. That’s not a company, it’s an idea.

Using Netscape’s Web browser to trade, people entered the stock market, many for the first time. Their demand – demand that was created and took place well outside the cozy club that Wall Street used to be – made stocks surge. Those that didn’t sell and sell fast, as “friends of Frank” did, lost money. Lots of money.

NASD says, in essence, that wasn’t informed demand. Insiders made money while the public – not knowing about the deals insiders could get – lost. That’s why Quattrone is in such trouble. And it’s why – while he may spend every penny of the $200 million NASD says he made in 2000 – he’s facing an uphill fight.

Share  Posted by Chris Nolan at 9:31 PM | Permalink

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