King of tech IPOs guilty

The deflation of the Internet bubble continues to uncover ironies. In the latest, as Google gears up for its IPO, the alleged king of technology IPOs, Frank Quattrone, has been found guilty by a jury.

Quattrone was not necessarily found guilty for what he did (in fact many find it difficult to explain what he actually did), but was found guilty of obstruction of justice and was brought down by a single e-mail on which the jury hung its verdict. He will be sentenced in September.

Quattrone headed the technology investment group at Credit Suisse First Boston (CSFB), a subsidiary of the prestigious Credit Suisse bank and arguably one of the hardest working investment banks during the IPO boom of the mid-1990s.

In many ways, Quattrone typified the boom. He came from a South Philadelphia working-class family, prospered and brought to market companies such as Amazon.com. In his heyday, he was reported to have earned an annual income of $120 million (about R780 million).

During the Internet listing boom, he and his team were "the masters of the universe" as they were in the centre of the longest running rise Wall Street had ever seen.

Paul Vecchiatto, journalist, ITWeb

During the Internet listing boom, he and his team in CSFB`s technology group were "the masters of the universe" as they were in the centre of the longest running rise Wall Street had ever seen. Everyone wanted a part of the action and they were the gatekeepers who decided who got a bit of the action.

Apparently, as part of the deal for listing new companies, they would receive somewhere between 2% and 4% of the shares to allocate as they wished. This meant that if CSFB wanted to curry favour with some of the more prominent businessmen, who in turn could bring them business, they would allocate these shares to them at a preferential rate.

This was a major factor in the "ramping" of share prices once a company listed. The share price would rapidly climb from its listing of, say, $1 to levels exceeding $100 per share the following day and then rapidly fall south to around $10 and then drift slowly down to a few cents. Naturally, those caught on the wrong side of such a move would not have been happy about it - and many were caught.

During his two trials (the first ended last year with a mistrial), Quattrone argued that such share allocations were frowned upon by the regulators and by his bank, but that it was an industry standard.

The e-mail that nailed Quattrone was one in which he stated that his co-workers "clean up their files" on hearing that the Securities and Exchange Commission was going to conduct an investigation on how shares were allocated. This one e-mail, out of hundreds that were presented at his trial, sealed the jury`s verdict as until then it could have gone either way.

South African new listing patterns emulated their US peers during the 1990s. There was more than one case of share ramping and the absence of a regulator with teeth, the preponderance of an "old boys club" and companies` reluctance to impart meaningful market information meant that more fingers were burnt here than people realise.

The JSE has gone some way to meet the need for more market transparency. This includes the mandatory requirement that directors disclose their share dealings and that results disclose a lot more information than they used to. However, a lot more needs to be done by the exchange and the listed companies.

Google has partially solved the problem of fair share allocation by using an auction method. It is by no means perfect, but it will lessen the stigma attached to arbitrary share allocation.

Hopefully, South African companies that either decide on a new listing or increase their shareholdings will emulate Google, but also look for even more transparent ways of allocating shares.