Saturday, March 25, 2006
Former tech investment banker Frank Quattrone had quite a positive week. First, the Second Circuit reversed his obstruction convictions due to improper jury instructions, then a few days later the Securities & Exchange Commission reversed the NASD's order barring him permanently from working with any broker-dealer. In 2002, the NASD, New York Stock Exchange (NYSE), and SEC Enforcement Division began investigations of so-called "IPO Spinning" by Credit Suisse First Boston, in particular the awarding of shares in hot IPOs by Quattrone to corporate executives as a way to win their company's investment banking business down the road. During that investigation emerged the famous "cleanup" e-mail forwarded by Quattrone, urging employees to clear out their files of unnecessary documents when there were pending civil and grand jury investigations, which ultimately led to the obstruction charges. In response to an NASD demand -- called a Rule 8210 Request -- that Quattrone testify about the e-mail, he asserted his Fifth Amendment privilege. The NASD then initiated a separate proceeding and ordered that he be barred from the securities industry because of his failure to provide information. Regarding the Fifth Amendment, the NASD took the position that it was not a "state actor" and therefore the Fifth Amendment was unavailable. Quattrone challenged that position, arguing that the coordinated SEC-NASD investigation meant that he could assert the Fifth Amendment and refuse to testify without that being the basis for an automatic sanction.
The full Commission did not rule on Quattrone's "state actor" argument, finding instead that there was a genuine issue of material fact regarding that question, and therefore the NASD's summary rejection of the argument and imposition of a sanction was improper. The Commission's opinion (here) states:
We do not reach the merits of the issue of whether the Rule 8210 Request constituted state action because we hold only that Quattrone should have been allowed to present evidence to support his claim that the requisite degree of coordination between NASD and the Commission existed here. Applicable law indicates that cooperation between the Commission and NASD will rarely render NASD a state actor, and the mere fact of such collaboration is generally insufficient, standing alone, to demonstrate state action. However, Quattrone proffered enough evidence concerning the Joint Investigation to earn an evidentiary hearing. Therefore, although we consider the burden of demonstrating joint activities sufficient to render NASD a state actor to be high, NASD should not have summarily dismissed the claim that, on the facts of this case, the Rule 8210 Request constituted state action.
While certainly welcome news, the SEC decision does not mean that Quattrone is out of the woods. Prior to the NASD's demand for testimony regarding the e-mail, it had already notified Quattrone that it intended to pursue an enforcement proceeding for the IPO spinning, a position it did not pursue further once it imposed the lifetime ban for taking the Fifth Amendment. The NASD is free to restart that proceeding, and may well in light of the uncertainty related to the e-mail issue. Similarly, the government has not announced whether it will retry Quattrone a third time, and the Second Circuit's opinion finding that sufficient evidence had been introduced at trial to support the convictions may impel the U.S. Attorney's Office to move forward.
Another possibility is that Quattrone will reach a civil settlement with the SEC and NASD, with the imposition of a significant civil penalty and industry bar, after which the criminal case will be dropped. While the situation remains fluid, the SEC's narrow opinion does not say anything about the merits of the NASD's enforcement action, so it is not much of a harbinger of how the criminal and civil cases are likely to proceed from here. The case goes back to the NASD to consider its options, and because the IPO spinning issue has never been fully aired, I suspect the NASD (and even the SEC) will pursue charges against Quattrone. (ph)