So long, Frank Quattrone scandal. Now about those stock options

Posted by: Peter Burrows on August 22, 2006

I can’t help recalling the fervor that surrounded Frank Quattrone in early 2003, when news broke that New York State Attorney General Eliot Spitzer was investigating various allegations against the super-rich investment banker. Even as some of those allegations fell away leaving only an obstruction of charge, based on an e-mail from Quattrone ordering his staffers to “clean up” their files after the firm had been notified of the federal inquiry, the overall sense among many of the folks I know remained the same: Quattrone was never going to work in this Valley again.

Evidently, that’s not true. But my thought for the day is this: If a supposedly strong case against Quattrone ended with such a wimper, what does the future hold for companies currently implicated in the stock options scandal? It’s a safe bet that most of the 80 or so companies that face federal probes will never result in anything approaching what Quattrone faced—no criminal charges, grand jury indictments, even a conviction later overturned on appeal. Most of those companies will restate their earnings, and in some cases pay a penalty to settle civil charges from the SEC (of course, Quattrone’s former employer CSFB’s settlement was a whopper: $200 million).

But what about the big criminal cases related to the options accounting mischief? No doubt, former Comverse CEO Kobi Alexander likely has quite a bit to hide—since he’s done such a good job of hiding himself since being charged earlier this month. Then there’s former Brocade Communications CEO Greg Reyes. The word in Silicon Valley is that he’s in a heap of trouble, and you can bet there will be more criminal charges against other former high-fliers brought in the weeks and months to come. But its worth recalling the poor prognosis Quattrone seemed to have back when he was charged, and before he was able to mount his well-funded defense.

No doubt, Quattrone was one case and there will likely be many options-related cases—so the odds of convictions and prison time are far more likely. What’s interesting to me is how both of these scandals in their early innings suggested the same thing: that Silicon Valley was a hotbed of ethical depravity and excess. No doubt, today’s settlement won’t clear Quattrone’s name entirely. But as of today, it became just a bit more likely that the history books will remember Quattrone not primarily for his run in with the law, but for his role as a financier during the Net Boom and for whatever he may do in the future. At the end of the day, do you think the stock options scandal will leave a more damning legacy on tech business culture?

Reader Comments

Blissex

August 23, 2006 7:54 AM

Well, in the stock options scandal there is an element that I think means open-and-shut cases: the tax issue.

In-the-money options are taxed as income, not capital gains. I would be very surprised if those receiving backdated, in-the-money options declared them as income.

Given the very large amounts of money involved, the amount of tax due and not paid is usually large enough that longish jail sentences are sort of unavoidable.

SCC

August 25, 2006 10:49 PM

Wall Street and corporate America are rife with fraud and self-dealing. Wall Street firms that knowingly break the law are punished by nothing more than fines without even having to admit guilt. The research scandal of a few years back is a good example of this. When a company makes billions of dollars per year in gross profit, a $200 million fine is nothing.

There have been some high-profile CEO convictions in recent years that make one feel quite satisfied. Bernie Ebbers (Worldcom), Dennis Kozlowski (Tyco), the Enron guys. But Wall Street always seems to escape unscathed. Four Merrill Lynch executive recently had their convictions for their efforts to help Enron commit fraud overturned.

Wall Street is coated in Teflon.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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