Confessions of a Wall Street Analyst (47 page)

Jack later recanted his e-mails, saying that he had essentially made up all of that stuff to appear more important in Carol’s eyes. But Eliot Spitzer’s team now had ammo, and they dug into the corners of upper-crust Manhattan to decipher Jack’s note. Here’s what they found, according to the complaint later filed by the SEC.

It turned out that Jack’s negative comments on AT&T for the years prior to his upgrade had really angered Mike Armstrong, who mentioned it on several occasions to Sandy Weill, the complaint claimed. In a textbook case of interlocking directorships, Mike was on Citigroup’s board, and Sandy was on AT&T’s board. Although analysts were supposed to have their own opinions, Mike didn’t see anything wrong with trying to use his persuasive powers to get Jack to think more positively about the stock. Jack had a lowly Neutral rating on the company at the time and regularly criticized the company to anyone who would listen.

According to the SEC complaint, AT&T management complained to Sandy that Jack hadn’t called AT&T one of the “important telecommunications companies of the future” at a 1998 trade show. Sandy told some senior Salomon Smith Barney bankers, who told Jack. Jack, who had once worked at AT&T, then wrote a letter of apology to Sandy, dated October 9, 1998, which mentioned that he would also apologize to AT&T management when appropriate. “I want to make it perfectly clear,” he wrote to Weill, “that the last thing I want to do is embarrass the firm or myself or for that matter have AT&T put in an awkward position in dealing with Salomon Smith Barney.”
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Sometime around the beginning of 1999, Sandy asked Jack to take a “fresh look” at AT&T.
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According to the SEC, Jack agreed to do so and sent a long questionnaire to the company, an unusual but legitimate approach when considering initiating coverage, changing an opinion, or simply writing a new report. Eventually, the company responded. Sandy then set up a meeting at AT&T for Jack with Mike and other top AT&T executives on August 5,1999. Just to put this in perspective, never in my 14 years on Wall Street did any senior executive of my firm, much less the CEO, get personally involved in the research process or arrange a meeting for me.

Jack wrote Mike a follow-up letter two weeks later, asking for the company to open its kimono a bit more and hinting at the possible outcome. “When my analysis is complete and if the results are in line with what you and I are both anticipating,” he wrote, “once I’m on board there will be no better supporter than I…. As I indicated to you at our meeting, I would welcome the role of being a ‘kitchen cabinet’ member to you.”
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He sent copies of the letter to Sandy, the head of SSB investment banking, and the head banker covering AT&T, telegraphing where he was going.

So Jack’s “fresh look” was well underway by the time AT&T’s board of directors approved the idea of an IPO for its wireless business at a meeting in October 1999—a decision in which Sandy, as a board member, participated.
According to the SEC’s complaint, Sandy and Jack then discussed the status of Jack’s analysis.

According to the investigators, Sandy was pressuring Jack for a better rating on AT&T’s shares. But Jack allegedly wanted something out of it too. He was just then in the process of trying to get his twins admitted to one of the most exclusive preschools in Manhattan, the 92nd Street Y, and he wondered if Sandy could help him out.

On November 5, just over three weeks before Jack’s upgrade, he sent a memo to Sandy Weill that was later released as part of Spitzer’s evidence. Its title: “AT&T and 92nd Street Y.”
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Never one for subtleties, that Jack. After talking about his “good meeting” with Mike Armstrong, and discussing some more upcoming ones, he changed subjects.

“Given that it’s statistically easier to get into the Harvard Freshman Class than it is to get into pre-school at the 92nd Street Y (by the way, this is a correct statement), it comes down to ‘who you know,’ he wrote. “Attached is the list of the Board of Directors of the 92nd Street Y….If you feel comfortable…I would greatly appreciate it if you could ask them to use any influence they feel comfortable in using to help us as well…. Anyway, anything you could do Sandy would be greatly appreciated. As I mentioned, I will keep you posted on the progress with AT&T which I think is going well.”

Jack met with AT&T executives a few more times and on November 29, 1999, to the surprise of everyone, including me, upgraded AT&T from a Neutral, or “3,” rating to SSB’s top rating, Buy, or “1.” In an e-mail, Jack pushed SSB’s publications department to hurry so his report could be “distributed in time to meet Sandy Weill’s deadline (before the AT&T board meeting).”
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His 36-page report, which came out the next day, attributed the upgrade to his new fondness for AT&T’s cable telephone plans, a complete reversal of his prior position. In a fabulous coincidence, in mid-December of 1999, Sandy called a member of the 92nd Street Y board and asked for help getting Jack’s twins into the school, saying he would be “very appreciative.” Apparently, in Manhattan’s high social circles, “very appreciative” is code for “very generous.”
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A few months later, in March 2000, the kids got in. According to the complaint, the board member called Sandy back and then suggested a donation. It was approved in July, not to be made by Sandy personally but by Citigroup, for $1 million.

The arrangement paid off. That $1 million tax-deductible donation was
a small price to pay in another way too. When AT&T selected SSB as one of the underwriters for the wireless IPO in early 2000—the one I was sure CSFB would win, the one that prompted my outburst to CFO Chuck Noski—SSB and its parent, Citigroup, collected a $63 million fee. In making its decision, AT&T assessed the views of the analysts covering its stock—much as Level 3 had done with its analyst scorecard. Jack, who had been on the company’s bad side, suddenly received one of the highest possible scores. And in February of 2000, John Reed, Sandy’s co-CEO at Citigroup, resigned, although every major newspaper reported that he had been forced out by Sandy and the board. That $1 million looked like a pretty darn good investment.

Jack, his work done, was no longer afraid to stand up to Sandy. He was the “Power Broker,” after all. Three weeks after the AT&T Wireless IPO was completed, he allegedly began to criticize AT&T again in conversations with clients, although he didn’t tell SSB’s retail brokers nor did he lower his Buy rating on AT&T shares. A few weeks later, AT&T investor relations executive, Connie Weaver, wrote in an internal e-mail to Mike Armstrong and some other AT&T executives that institutional money managers were viewing Jack’s banter as a “virtual downgrade.”
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Finally, in October 2000, he made it official. He downgraded AT&T shares twice, first from Buy, or “1,” to “Outperform,” or “2,” and then, later in the month, down to Neutral, or “3,” making a complete round-trip in less than one year. The irony, of course, was that Jack would have been right about AT&T if he had simply ignored Sandy’s request for a fresh look and pursued other preschool options for his children. As it turned out, his twins attended the 92nd Street Y preschool but were not accepted into any of the private elementary schools Jack and his wife had wanted. Today, the twins attend a New York City public elementary school on the Upper East Side of Manhattan.

Both Jack and Sandy Weill denied Spitzer’s allegations. Weill called the 92nd Street Y donation simply a gesture he would make for any valued Citigroup employee. Weill did admit to asking Jack to take a “fresh look” at the stock, but he said that’s where it ended.
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And Jack, under questioning by Spitzer’s folks, said he wrote that incriminating e-mail to Carol Cutler because he wanted to “impress a friend.”

It was clear that Carol was duly impressed by Jack already, so much so that she was offering to perform various sexual favors for him, according to
multiple e-mails quoted in Gasparino’s
Blood on the Street,
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and even trying to convince him to leave his wife, according to one account. So one of Spitzer’s investigators asked him, “Why would you need to impress someone you already won over?”
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It was a good question, a question that could be asked of a lot of Jack’s actions over the past decade or so.

So Long to the Street

By the end of November 2002, most of this information had been vetted and aired in the press, thanks to a series of leaks. Yet the material was so salacious that even the investigators were reluctant to discuss it in detail. Although neither the
Journal
nor the
Times
would print the titillating parts of the e-mails, the rumors about them had certainly hit the Street.

The New York
Daily News,
however, couldn’t resist making one reference. “Grubman, who is married and was then a $20 million-a-year analyst for Citigroup, was boasting about how he helped Sandy Weill become CEO of the world’s biggest financial company when the talk moved from surging stocks to oral sex. The money manager claimed to be an expert—and Grubman was intrigued,” the story reported.
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But that wasn’t all: Spitzer’s team had by this point found e-mails from Jack, like Henry Blodget’s, in which he indicated he did not believe his own published Buy ratings on a variety of startup local phone companies for which SSB had done banking business. Although some called Spitzer’s moves a witch hunt, I thought he was zeroing in on the right people. Perhaps the Street might start to clean up its act.

On December 20, 2002, Spitzer announced, with great fanfare, the preliminary outlines of a settlement with 10 investment banks, one that had involved an enormous amount of behind-the-scenes arm-twisting and poker playing. Every possible regulator managed to attach its name to the document, including the New York State Attorney General’s Office, the NASD, the SEC, the NYSE, and various state agencies. Everyone wanted to be able to claim some form of victory, late as it was.

The banks agreed to pay a combined fine of $1.4 billion, with greater fines paid by those banks with greater alleged research fraud and conflicts of interest. Paying the largest fine, $400 million, was Citigroup’s Salomon Smith Barney. Of that, $300 million would go to investor restitution, $75
million toward funding independent research, and another $25 million to investor education. CSFB and Merrill were fined $200 million each. And all 10 banks agreed to the following additional terms:

“This agreement will permanently change the way Wall Street operates,” Spitzer announced, flushed with pride.

Would it really? Certainly, I was happy that finally someone had taken a hard look at our industry and dumped its dirty laundry into the Street’s collective lap. I just hoped he wouldn’t stop with the firms but would also take his crusade right to the door of the individuals who broke the rules. After all, I thought to myself, if firms are fined, that firm’s shareholders suffer. By contrast, if individual executives are punished, shareholders will benefit because executives are more likely to behave better in the future and spend more time actually running their companies instead of lining their own pockets.

But Eliot Spitzer decided to put the brakes on. The $1.4 billion in fines, while seemingly substantial, were small when compared with the more than $80 billion in profits made by these banks over the past few years. And by allowing the accused to settle the cases, without admitting or denying guilt, Spitzer stopped his investigation in its tracks. We will never know for sure how far up the chain any of these conflicts went or how involved top Wall Street executives, including Sandy Weill, actually were in the research process. In order to create real change on Wall Street, I believe, prosecu
tions of Wall Streeters needed to go forward, wrongdoing had to be proven, and then heads had to roll—big ones. Unfortunately, it now looked as though this would never happen.

The feds, but not Spitzer, did, however, go after one specific individual. As 2003 dawned, the noose around Frank Quattrone’s neck grew tighter and tighter. He was still at CSFB, but the word was that he could soon actually face federal indictment. On March 4, 2003, CSFB employees received a terse e-mail announcing that Frank had resigned, “effective immediately.” CSFB said that “the Firm and Mr. Quattrone have agreed that it was in their respective best interests for Mr. Quattrone to separate from the Firm at this time.”

Just as Martha Stewart wasn’t charged with insider trading by the U.S. Attorney’s Office, Frank was never charged with IPO spinning, or even encouraging fraudulent research by some tech analysts who reported to him. Instead, on May 12, 2003, he was charged with obstructing justice. The key evidence was an e-mail he had sent to his staff suggesting a routine year-end file cleanup. In 2004, after one mistrial, he was found guilty. At this writing, he faces 18 months in prison but is appealing the verdict.

On April 9, 2003, just a few weeks after my 50th birthday, I officially left CSFB. “As most of you know,” I wrote in a note to clients and colleagues, “I have been planning for a long time to take early retirement from CSFB after 20 years in the telecom industry and 14 years on Wall Street. CSFB’s wireline telecom services research is now solidly in the able hands of Lara Warner and my terrific long-time teammates Julia Belladonna, Ido Cohen, and Connie Marotta…It has been a pleasure working with each of you over the past years. I have thoroughly enjoyed and benefited from every discussion and debate we have had. I hope you feel the same.”