Bad Vibes From Good Times - Company Financial Information

During the IPO frenzy of the late '90s, investment banks cleaned up. Now investigators are looking in their trash.

THE EMPLOYEES OF SIMPLEX SOLUTIONS did something for lunch last Wednesday that is increasingly rare: They celebrated the initial public offering of their technology company. At the chip-design software firm in Sunnyvale, Calif., workers dined on barbecued fajitas and drank margaritas as Simplex's shares climbed 77 percent on their first day of trading.

There's little doubt that Simplex's lead underwriter, Credit Suisse First Boston, was celebrating, too. But the bankers' festivity was probably a little less giddy -- the way an embattled football coach celebrates a victory amid a season of dismal defeats and nitpicky second-guessing.

It was the first tech IPO that CSFB lead-managed this year. Perhaps more important, it was some good news when the bank needed it most.

CSFB has emerged as a focal point of a probe by the Securities and Exchange Commission and the U.S. Attorney's office into the IPO allotment practices of several investment banks. In the government's investigation, first reported in the Wall Street Journal, the SEC is looking for evidence that underwriters parceled out hot, hard-to-get IPO shares to some investors in exchange for higher-than-standard commissions on subsequent trades. The agency is also considering whether those commissions amounted to kickbacks. Bear Stearns, Goldman Sachs and Morgan Stanley Dean Witter are among other banks reportedly contacted in the SEC's probe. None of those banks would comment.

Word of the probe surfaced in December and may have claimed some victims at CSFB. The bank, home of superstar technology banker Frank Quattrone and his group of technology bankers and analysts, placed two employees in Quattrone's office, John Schmidt and Michael Grunwald, on leave in April. Lawyers for Schmidt and Grunwald didn't return calls for comment. A source close to CSFB says that the move was related to the probe.

"The firm is cooperating fully with regulators," said Charles G. Ward, the co-head of CSFB's global investment banking division, in a statement. Ward said the decision to put two employees on leave had nothing to do with its technology group's clients or directors. Quattrone wouldn't comment for this story, but Ward said Quattrone "is not and was not responsible for overseeing brokerage accounts or commissions, nor is he or was he responsible for IPO allocations." The SEC doesn't comment on investigations as a matter of policy.

In April, the National Association of Securities Dealers told three CSFB brokers that it's investigating them for undisclosed violations of NASD rules that could result in disciplinary actions, according to NASD disclosure documents. The brokers denied violating any rules, the documents show. CSFB wouldn't confirm or deny that the NASD probe has any relation to the government investigations.

A banker in Quattrone's group who spoke on the condition of anonymity notes his boss is mobilizing against the negative publicity. Quattrone "told us to tell our clients that everything's fine, and if they have any questions they can ask him directly," the banker says.

Of course, the banks are hoping the probe will simply go away. That's what happened four years ago when the SEC launched an investigation into "spinning" -- the practice of allotting hot IPO stock to important clients in order to win business. That investigation concluded spinning was legal, albeit ethically questionable.

Could that happen again? It might, but this time the government isn't just investigating a clubby insider-banking technique designed to attract business. It's looking into whether the banks violated disclosure laws and, in effect, took more money from hot IPOs than they said they would.

John Coffee, professor of law at Columbia University, says the involvement of the U.S. Attorney's office in New York - which has called a grand jury to hear evidence in the case - means that the case is more serious than others in the past. "Rightly or wrongly, when U.S. attorneys subpoena in a case, they indict what they investigate," adds Coffee, who specializes in securities regulation.

At issue now isn't just the bigger allotments of hot IPO stock in exchange for higher commissions on subsequent trades, but also that the banks may have violated laws by failing to disclose any higher commissions along with their usual percentage of the proceeds in the IPOs' prospectuses, says Jay Ritter, a professor of finance who specialized in IPOs at the University of Florida. Ritter notes it's not illegal to charge higherthan-normal commissions for trades.

"Investment banking is to some degree a relationship business," he says. "But while some practices create conflicts of interest, when underwriters violate disclosure laws it's serious."

While many of the people contacted for this story professed a wary ignorance of the current investigations, the reaction could amount to wishful thinking that the whole mess might disappear. Until now, Silicon Valley's money machine has been remarkably free of the taint that damaged Wall Street reputations in the 1980s. But if someone of Quattrone's stature stumbles, then his coterie of wealthy executives and venture capitalists will get bruised.

That's not to say Quattrone hasn't made any enemies on his way to being the Valley's most influential banker. Brash and ultra-competitive, he isn't out to win friends among his peers; he wants to win clients. In 2000, Quattrone's technology group led all banks in combined lead-managed financings and merger-and-acquisition market share with 31 8 transactions, valued at $314 billion.

"Without a doubt, there are people out there taking some satisfaction over Quattrone eating humble pie," says Paul Saffo, director of the Institute of the Future in Menlo Park, Calif.

But the schadenfreude may have to wait. The investigations are still in their early stages and could drag on for months, or even years. In the meantime, there is a growing sense that investment bankers are victims of their own excesses: Dozens of public companies pumped out to a ravenous market are out of business or trading below $1 a share.

For many in the Valley, no matter how the probes turn out, life will go on. "I bet you in New York they're buzzing about this a lot more than in Silicon Valley," says Saffo. "Here, people are preoccupied by how they might get funding for their next big idea."

Gary Rivlin, Miguel Helft and Megan Barnett contributed to this story.

                          Quantity vs. Quality
           Poor post-IPO performances are fuelinga sense that
          investment banks were reckless duringthe IPO frenzy.
                                  OFFERINGS     NO LONGER
INVESTMENT BANK             IPOS  BELOW $1 [*]   TRADED [**]
CS First Boston [***]       110      17            17
Goldman Sachs                80       9             9
Robertson Stephens           54       9             8
Morgan Stanley Dean Witter   51       6             2
Lehman Brothers              35       4             3
Deutsche Banc Alex. Brown    34       3             6
Merrill Lynch                31       6             6
Bear Stearns                 26      10             1

INTERNET-RELATED IPOS FROM JANUARY 1998 THROUGH SEPTEMBER 2000.

(*.)AS OF MAY 3. 2001.

(**.)INCLUDES COMPANIES THAT WERE ACQUIRED OR ARE NO LONGER IN BUSINESS.

(***.)INCLUDES IPOS FROM DONALDSON, LUFKIN & JENRETTE.

SOURCE: THE STANDARD USING DATA FROM IPO.COM AND BLOOMBERG

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