The Sacrificial Lion No one knew the Valley like Frank Quattrone. And now he's being blamed for the worst of its excesses. Sound familiar?
By John Heilemann

(Business 2.0) – Is Frank Quattrone the new Michael Milken? That's the question on many minds in Silicon Valley and on Wall Street since April 23, when the tech-banking capo di tutti capitalists was arrested and charged with obstruction of justice. Unlike many in the Valley, I cannot claim to be a "friend of Frank" (in any sense of that now-notorious phrase). I did, however, interview him several times, report on the startups he helped take public, and run into him socially now and again. He struck me as a decent guy, if secretive and paranoid about the press (or maybe it was just me). He was proud of his role in the rise of the Valley, perhaps a little too proud. He didn't consider himself a mere financier, let alone a standard Wall Street suit; he referred to such folks as "drones" and "carpetbaggers." Instead, he put himself in the most exalted boom-era category: entrepreneur. Now he may be headed to prison. How are the mighty fallen.

The analogy with Milken is unavoidable, though so far it's been drawn without much precision. In 1988, after being charged with myriad forms of securities fraud, the Drexel Burnham junk-bond kingpin pleaded guilty to six felonies, paid $1.1 billion in penalties, and was sentenced to 10 years in jail (he served just under 2). Quattrone is in similarly scalding water: forced to resign from Credit Suisse First Boston; charged with doling out hot IPO shares to win deals ("spinning") and pressuring CSFB analysts to write favorable reports on startups he brought public; accused, most explosively, of urging his colleagues to destroy documents two days after learning that his firm's IPO practices were being investigated by three different regulators--and a few hours after being told by CSFB counsel that he should get himself a criminal lawyer.

But if Quattrone is being cast as Milken 2.0--as the symbol, along with Henry Blodget and Jack Grubman, of an era's financial corruptions--that just raises another question. Is Quattrone really a grade-A, lock-him-up-and-toss-away-the-key criminal, or is he a postbubble sacrificial lamb (or, more accurately, a sacrificial lion)?

Purely on the level of personality, Quattrone and Milken are as different as the decades and milieus in which they thrived. Milken, a middle-class Jewish kid from suburban Los Angeles, was self-centered, harsh, and grimly humorless. Quattrone, the grandson of Italian immigrants and reared in South Philadelphia, was expansive and goofy. (At IPO parties, he invariably sang karaoke to "Rocky Raccoon.") Milken's signature social occasion was the Predators' Ball, the infamous Beverly Hills soiree at which his clients reportedly indulged in all manner of decadence. Quattrone hosted a family-friendly Christmas party at the Tech Museum in San Jose, where the height of debauchery was an Imax screening.

On a deeper level, though, the parallels between them are inescapable. Both rose to dominance by financing upstart companies that challenged the corporate establishment. Both presided over autonomous fiefdoms based in California, with little oversight from their parent firms. Both carved out for themselves and their underlings highly unusual, and dizzyingly lucrative, compensation structures that included not only hefty salaries but a juicy cut of the profits generated by their wheeling and dealing. And both came to see themselves as existing not simply apart from but manifestly above the investment-banking mainstream.

That Quattrone viewed himself as a heroic outsider came through vividly in my meetings with him in the conference room of his offices in Palo Alto. Describing how he built Morgan Stanley's tech practice from the 1980s through the mid-1990s, he said, "I was this crazy pioneer pushing this big rock up this really big hill." The hill in question was Morgan itself, which rejected his demands for money and autonomy. "I told them, our business is real different, our clients are real different, so we've got to approach things differently," he said. "But the people at Morgan just didn't get it." Eventually, however, the guys back East (first at Deutsche Bank, then at CSFB) gave his team what it wanted--much to the chagrin of his Wall Street rivals. "We became the Oakland Raiders of the business," he said proudly. "The guys who everybody loves to hate."

However intensely Quattrone was hated (or feared), his downfall has summoned forth a legion of defenders (or apologists). This, too, he shares with Milken, whose loyalists loudly decried the government for conducting a "witch hunt" to nail their hero. Among those speaking out on Quattrone's behalf, the witch-hunt metaphor is frequently invoked, along with several related arguments: that the banking practices for which he is now being condemned were commonplace in the industry at the time; that he is being pursued by publicity-hungry politicians and regulators who want a well-known scalp for their trophy cases; that because of his prominence, he's being made to suffer for the sins of an era.

The notion that Quattrone is being turned into a scapegoat contains more than a few important elements of truth. It doesn't take an especially cynical mind to detect a degree of political calculation behind the postbubble Wall Street cleanup campaign. (If Quattrone is the new Milken, Eliot Spitzer is the new Giuliani.) Further, it's indisputable that Quattrone and his gang at CSFB were far from unique in parceling out IPO shares to keep existing clients sweet and to lure potential clients into the fold. At the peak of the boom, everyone did it. So why, then, is Quattrone being singled out?

Because scandals require scoundrels--the richer, more flagrant, and more cynical the better. (The reason Mary Meeker was spared the fate of Henry Blodget was not that her position was any less conflicted than his but that investigators found scant evidence that she had misgivings about the dotcoms she so lavishly praised; Meeker, it seems, was a true believer.)

Finally, there is no doubt that focusing on the dodgy behavior of financiers diverts attention from those who were equally culpable in the late-1990s mania--from greedy, insufficiently skeptical investors (whatever happened to caveat emptor?) to those high-tech CEOs (the friends of Frank among them) who pocketed the gains from sizzling IPO shares spun their way. Given that the only reason they got those shares was their corporate positions, didn't the profits rightly belong to their companies?

But to say that Quattrone has been singled out is not to say he's been wrongly singled out. In law enforcement and public policy, there is, in fact, a persuasive case to be made for scapegoating--for making examples of big-time, big-name wrongdoers. The case can be boiled down to a single word: deterrence. If even the most powerful and influential players are shown to not be above the law, a message is sent to those further down the ladder: Everyone might do it, but not everyone gets away with it--so watch your step. And though this message may be forgotten by the time the next boom rolls around, the ensuing situation would be far worse if the message weren't sent at all. This is one of the lessons of Milken. Insider trading still occurs on Wall Street, but nobody sensible believes that Milken's incarceration and public humiliation (and those of Ivan Boesky, Martin Siegel, and their cohorts) haven't curbed such abuses significantly.

The case for making an example of Quattrone, of course, turns on whether he did anything wrong. For the most part, his alleged misdeeds seem less than Milkenesque--which isn't to say they are not serious. Spinning may have been widespread during the boom, but the National Association of Securities Dealers still considers it a violation of its rules. And while everyone now admits that the Chinese wall between investment banking and research had become as porous as a piece of mesh, the system Quattrone instituted--in which he supervised and paid CSFB's analysts and linked their compensation to investment-banking revenue--turned the piece of mesh into a basketball net. And then there's the matter of obstruction of justice. Telling your subordinates to trash documents is always a risky move. Telling them to do so when your firm is under scrutiny by the Securities and Exchange Commission, the NASD, and the U.S. Attorney suggests you have something to hide. It can also land your ass in jail.

Quattrone insists he's innocent, and who knows, maybe we'll learn that he is. But the system he helped devise and profited so handsomely from has, in a way, already been proven guilty. It has undermined confidence in the fairness of the public markets, convincing people, with good reason, that during the Internet era, the game was rigged so insiders would profit while everyone else got taken to the cleaners.

Is Quattrone a villain, or is he a fall guy? The question is a false binary. As it was in the case of Milken, the best and only answer would seem to be: both.

John Heilemann's next book, "The Valley," will be published by HarperCollins in 2004.