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BOOK REVIEW: Randall Smith, The Prince of Silicon Valley (New York: St. Martin's Press, 2009), 368 pp. $30.00.
Why was this biography published? True, the career of Frank Quattrone must be of interest to anyone concerned with American business history: He was the premier investment banker of the 1990s. But Quattrone today is only 54, and he has (as of March 2008) launched a new firm: Qatalyst Partners, self-described as “a technology-focused merchant banking boutique.” So, one could understand the publication of a lengthy magazine profile of Quattrone’s past, present, and future. But a book-length biography? It seems oddly timed.
The explanation, I suspect, is that The Prince of Silicon Valley was never intended to be a biography of Quattrone, only an invitation to his beheading. It was probably conceived as another installment in the Left’s endless saga of “corporate crime and punishment.”
Boston civil-liberties lawyer Harvey Silverglate estimates that the average American commits three felonies a day. Imagine, then, the number of felonies, misdemeanors, and other punishable offenses that are committed each day by someone in the securities industry, given the ten thousand commandments that have regulated that field since the New Deal. Note, in addition, that the prosecutors of businessmen typically spend only a few years in their “public interest” careers, during which time they seek to pad their resumés with high-profile convictions, in order to obtain lucrative employment at private law firms. Add, lastly, that most business reporters despise “Wall Streeters” and are constantly demanding their prosecution. The result is what I call “the media-regulatory complex,” and woe to any businessman who becomes its target.
Prosecutors seek to pad their resumes with high-profile convictions.
The most famous contemporary target was Michael Milken, whose persecution was conducted by Wall Street Journal reporter James B. Stewart and U.S. Attorney Rudy Giuliani. Stewart won the Pulitzer Prize for his reporting and turned his Journal articles into a best-selling book; Giuliani, of course, went on to become mayor of New York City. Randall Smith is himself a reporter for the Journal and, surely, as he spent year after year writing articles that attacked Frank Quattrone, he must have thought about repeating Stewart’s success. After all, in the Left’s narrative, the Milken story featured the greatest investment banker of the 1980s; a financial revolution wrought by junk bonds; the indiscriminate launching of leveraged buyouts; the S&L debacle; and, ultimately, Milken’s ten-year prison sentence. The Quattrone story featured the greatest investment banker of the 1990s; a financial revolution wrought by computer technology; the indiscriminate launching of Internet companies; and the dot-com bust. The parallels must have seemed near-perfect. All that was lacking was the penal conclusion, but that doubtless would come. Thanks to a story by Smith, in January 2003, New York State’s attorney general and the U.S. Attorney in Manhattan began to fight for the honor of taking Quattrone’s scalp.
And then, against all odds, Frank Quattrone repulsed every attempt to convict him of wrongdoing. The humbling of Quattrone backfired and became the humbling of his persecutors. The journalistic vilification of his career fizzled. What could a reporter do with several years’ worth of anti-Quattrone articles? He might have reconsidered his viewpoint, of course. But Smith evidently would not or could not. Witness this book.
Early on, Smith implies that Frank Quattrone’s fundamental fault is his refusal to be one of “the team.” For example, we are told that when Quattrone rejoined Morgan Stanley, in 1981, after getting an MBA at Stanford, he refused a “mandatory” transfer back to New York headquarters, so that his wife could make good on her commitment to a California job (19-20). As a result, says Smith, Quattrone failed to absorb the Morgan Stanley culture, which “might have imbued him with more team spirit. That culture called for individual bankers to make sacrifices for the good of the entire enterprise” (20).
Quattrone was the embodiment of team spirit.
In fact, as this book makes clear, Quattrone was the embodiment of team spirit. For example, Smith writes: “One of the hallmarks of Frank’s investment banking style became client entertainment. It is a Wall Street staple, and all securities firms do it. But Quattrone took it to a higher level, using river rafting, golf, and skiing to bond with clients. ‘Become friends with clients,’ Quattrone would tell his group. ‘People hate disappointing their friends” (p. 23).
What Smith misses is that Quattrone’s spirit embraced many teams, and he saw no need to sacrifice any one of them to any other. On the broadest plane, there was Quattrone’s dedication to the “team” of computer entrepreneurs who were revolutionizing the American economy; this was his “tech evangelism” (19). But there was also the smaller team of Silicon Valley entrepreneurs, amongst whom Quattrone spent his adult life. Then there was the team that comprised his business compatriots and their customers. There was Morgan Stanley; the California branch of Morgan Stanley; and of course the tech group within that branch. Indeed, the very incident Smith cites against Quattrone’s team spirit proves it. For what is the family but the most important of all human teams?
No, the point of Smith’s remark about Quattrone’s lack of team spirit lies in the phrase “making sacrifices.” That is what the reader is supposed to see as Quattrone’s flaw: a lack of submissiveness and humility. If someone else had risked his future with Morgan Stanley for his wife’s sake, Smith might have portrayed it as a noble willingness to sacrifice his ambition. But Quattrone did not approach the matter that way. He refused to sacrifice either his family or his ambition. “When Morgan, Stanley acted as if no junior associate would seriously jeopardize his career over a spouse’s job at a fraction of his own compensation, Frank quietly bought a house in the Bay area and not so quietly began to interview with local firms. Morgan Stanley backed down” (20).
If pride is the characterological accusation against Quattrone in Smith’s narrative, anti-egalitarianism is the ideological accusation. Apparently, Quattrone went so far as to treat favorably high-tech entrepreneurs who might have something of value to offer him. Journalists berated this behavior by repeating endlessly the term “Friends of Frank,” which seems to have been coined by some of Quattrone’s associates, perhaps to mock his insistence that clients should become friends. As used by journalists, however, the term “Friends of Frank” suggested “an inside group receiving secret favors” (91).
The reality was more mundane. After Quattrone moved to Deutsche Bank in 1996, he launched a division of that bank’s private-client services group to deal with those high-tech people who were important to his business. Some of them had complained to Quattrone, when he was at Morgan Stanley, about receiving sub-par performance from the bank’s brokers, and Quattrone had found to his frustation that the brokers lay beyond his ability to punish or reward (70). At Deutsche Bank, Quattrone wanted a team of brokers that he could be sure would take care of important people, and he hired John Schmidt to head up a group that would do just that (69).
One of the most fevered accounts of individualized IPO allocations appeared in the Wall Street Journal .
Part of taking care of these clients was letting them in on initial public offerings (IPOs). That is, when Quattrone’s bank took a company public, a certain amount of the stock was set aside for the “family and friends” of the company’s top employees. The bank, too, received a certain amount of stock, which it could sell to its stock-trading customers at the initial price. Most of these shares went to the bank’s large institutional clients, but some percentage was sold to individuals, either to wealthy investors who gave a lot of business to the bank’s stock-trading division or to important executives at firms with which the bank was doing business or hoped to do business. This last was a natural extension of Quattrone’s long cultivation of Silicon Valley entrepreneurs, which dated back to the days when few investment bankers had believed in the geeks’ business ventures.
Business reporters were infuriated by this allocation of IPO shares to individuals who had become or might become successful. According to the Left’s outlook, the only acceptable form of capitalism is the one embodied in the absurd economic model called “perfect competition.” Under this model, no one should have any advantage over any other market participant—no advantage of wealth, or knowledge, or access, or timing, or friendship. That this theory has nothing to do with the real nature of markets, leftists do not see as a flaw in their theory but as a flaw in reality. Because “perfect competition” is supposedly the embodiment of equal opportunity, leftists believe it to be also the moral ideal. Reality must therefore be made to conform to it, by regulations or laws or public censure. And during the last seventy-five years, the Left has had considerable success in getting such egalitarian legal strictures on the books and in making perfect competiton the public ideal of fairness.
Predictably, one of the most fevered accounts of individualized IPO allocations was printed in the news pages of the Wall Street Journal (November 12, 1997; quoted by Smith on 90). After describing the process (which was called “spinning”), reporter Michael Siconolfi drew the awful conclusion: the allocation of shares to institutions and people of importance “leaves even fewer IPO shares for the small investor with no connections.” Imagine: People who have made something of themselves enjoy benefits that the rest of us do not. What is the world coming to? The reporter spoke sharply to his opposite numbers at the National Association of Securities Dealers (NASD): The practice in question, he wrote, “may violate regulatory rules.”
Siconolfi’s article also quoted a NASD lawyer as saying that there could be a violation of regulations even if there were no quid pro quo for such allocations of stock. But of course there was a quid pro quo. Relationships always involve a quid pro quo. If you send a Christmas card to a friend, year after year, and get none back—eventually you will stop sending one. So, too, with the allocation of IPO stock. The people responsible for stock allocation were not going to sell IPO shares to people who never did any other business with their firm. And Quattrone was not going to use his influence with allocators of IPO stock if recipients persistently took their banking business elsewhere.
Quattrone repulsed every attempt to convict him of wrongdoing.
Unfortunately, at Credit Suisse First Boston (CSFB), where Quattrone moved in 1998, a few brokers who allocated IPO shares took this perfectly reasonable attitude and turned it into a virtual kickback scheme. Essentially, they told people that they would not get IPO allocations unless they recycled 50 percent of their IPO profits back to the bank by doing some large but easy stock trades and paying high commissions on them (132). These large commissions boosted both bank revenue and the compensation of the individual brokers.
For myself, I do not see that requesting such kickbacks is immoral, as long as the bank permits such behavior by its brokers. Certainly, I do not think that seeking or giving such kickbacks should be illegal in a free market. But one of the security industry’s ten thousand commandments is a ban on brokers’ “sharing customers’ profits,” and that became the basis for condemning the practice (119).
The story of this kickback scheme is told at great length in Smith’s book (it takes up a third of the pages), and the author’s indignation rises with the telling, although his objection to it is never made explicit. Like most business reporters, Smith seems to treat government regulations as though they were dictates of natural law and to look upon violations of them as though they were crimes universally recognized. But the reader, however swept up by Smith’s narrative, soon begins to wonder: What does all this have to with Frank Quattrone? He was not a broker. He did not supervise brokers. Indeed, by Smith’s own account, the brokers in CSFB’s private-client services group never mentioned the kickback scheme to anyone outside the group, “including Quattrone” (198). So, what’s the connection to the subject of this biography? As it turns out: sheer accident.
In May 2000, NASD received a letter detailing how one CSFB broker had doled out shares of one IPO (VA Linux), and how one client (a professional trader, not a “Friend of Frank”) had paid a kickback in the form of a large order with a high commission. A week later, the NASD began to investigate (147). In September 2000, the SEC, which had received the same letter, also started to investigate and asked the U.S. attorney in Manhattan to get involved (168). But Frank Quattrone had no reason to fear these inquiries, and when his firm’s lawyers asked for all documents relating to VA Linux and another IPO, he sent them along.
Smith seems unable to accept that his journalistic persecution of Quattrone was misguided.
Then came the terrible coincidence that would put Quattrone through three years of Hell. On December 4, 2000, a Quattrone subordinate sent around an email suggesting that members of the tech group, before leaving for the holidays, should clean up their files in keeping with company policy. The next day, Quattrone endorsed the suggestion. What Quattrone did not know was that those files were now covered by the investigators’ subpoenas and that company policy regarding their disposal was therefore suspended. As a result of his ignorance and his email, Quattrone was fired, convicted of obstruction of justice, sentenced to eighteen months in prison, and suspended for life from the securities industry.
If one wants to understand how that could happen to an innocent man, The Prince of Silicon Valley helps to this extent: The book is a perfect example of the mob mentality that seemed to infect everyone concerned with Quattrone’s case, from journalist to jury to judge. If, however, one wants to understand how justice finally prevailed, and why Quattrone was acquitted of all wrongdoing, one will have a hard time extracting the answer from Smith’s account.
Even now, Smith seems unable to accept that his journalistic persecution of Quattrone was misguided. Toward the end of his book, Smith quotes a remark that Harvard professor Samuel Hayes made about Quattrone in August 2006, after the government had abandoned its case against him: “He’s a convicted person whose case was dismissed on a technicality, and the things he was accused of doing are serious crimes. You can’t put a scrambled egg back in the shell” (315). Though Smith does not mention it, Hayes is a renowned expert on shari’a-compliant finance and perhaps not the most objective observer of self-interested market behavior.
Be that as it may, Hayes’s remark was simply false. He implied that Quattrone was guilty (“he’s a convicted person”). But Quattrone was not a convicted person at the time Hayes spoke; Quattrone’s conviction had been overturned, and he was presumed innocent, like every other citizen. Hayes also implied that Quattrone’s claims of vindication were spurious (“his case was dismissed on a technicality”). But the appeals court’s decision did not rest on a technicality. It went to the very heart of Quattrone’s case: Had he written his email in order to obstruct justice? There was no evidence he had. That’s why the case was dropped. Lastly, Hayes implied that Quattrone had been professionally destroyed (“scrambled”) and that he could never regain his reputation (be put “back into the shell”). Those assertions have been amply falsified by Quattrone’s subsequent career. That Smith would quote Hayes’s absurd remark, three and a half years later, after the passions of the Quattrone case had cooled, suggests how blindly committed he has become to the narrative that he hammered out in his Journal articles.
At the end of Vladimir Nabokov’s Invitation to a Beheading, the protagonist is executed. He then rises up and moves toward visionary beings like himself. So has it been with Frank Quattrone. But though we may be grateful for his ultimate triumph, we should not forget what he was made to suffer. Nor should we forget that most victims of the media-regulatory complex are not as lucky as he was.
This review was published in the Spring 2010 issue of The New Individualist magazine.
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