Fraud cases largely were tied to CEOs, not bankers

Failed prosecution of Quattrone was rare trial of financial official

August 24, 2006|By Bloomberg News

NEW YORK -- The U.S. Justice Department's failed attempt to convict Frank P. Quattrone, the former Credit Suisse Group banker, highlights how Wall Street executives have largely escaped a government crackdown on corporate crime.

Quattrone, 50, won a decisive victory Tuesday when a judge approved an agreement by prosecutors to dismiss obstruction-of-justice charges if he breaks no laws for a year. Quattrone, who raised more money for Internet companies than any other banker in the 1990s, vowed to resume his business career.

During the six years that Quattrone faced accusations of wrongdoing, prosecutors secured about 1,000 corporate-fraud convictions, including those of former Enron Corp. chief executive Jeffrey K. Skilling and former WorldCom Inc. CEO Bernard L. Ebbers.

Prosecutors have largely concluded bankers didn't commit financial crimes and misconduct by them is better handled by civil regulators, lawyers said.

"The frauds of 2001 and 2002 were basically manipulations of corporate financial statements, and investment bankers don't do that," said John C. Coffee, a Columbia University law professor. "Most corporate financial distortions do not involve the use of investment bankers."

Other bankers being prosecuted are three former employees of Royal Bank of Scotland Group PLC's Greenwich NatWest Unit, who face trial for fraud in an Enron transaction.

Four former Merrill Lynch & Co. bankers were convicted of helping Enron inflate earnings and had their convictions overturned on appeal.

Wall Street firms have beefed up compliance efforts since the 1980s scandal involving Michael R. Milken, former junk-bonds chief at the now-defunct Drexel Burnham Lambert Inc. brokerage, and Ivan F. Boesky, a stock speculator with whom he collaborated, said attorney James D. Wareham of Paul Hastings, Janofsky & Walker LLP in Washington.

"Compliance procedures are light-years more advanced than they were during Boesky and Milken," Wareham said. "It was kind of the Wild West then. Now, there's an intense amount of scrutiny and the compliance and legal staffs have mushroomed at financial institutions. This comes down to the old question of do more cops on the street equal less street crime, and most people say yes."

Milken was sentenced to 10 years in prison after pleading guilty to six felony counts, and agreeing to pay $600 million in penalties to settle securities-fraud charges. He served 22 months after his term was reduced. Boesky served three years in prison and paid a $100 million fine.

Some recent Wall Street scandals, such as market timing in trading mutual funds, involve controversial conduct that isn't clearly illegal and may not generate criminal charges, said George A. Stamboulidis, a former federal prosecutor.

Prosecutors "want a head shot," said Stamboulidis, who leads the white-collar practice at Baker & Hostetler LLP.

The Quattrone case grew out of a probe of whether banks rigged initial public offerings by demanding kickbacks for access to shares. Prosecutors also looked at whether banks required investors to buy more expensive stock once companies went public. Credit Suisse agreed in 2002 to pay $100 million to settle regulatory investigations of "abusive IPO allocation practices." Regulators made similar charges against Quattrone, but dropped them on procedural grounds.

Prosecutors charged no one with such a scheme. Rather, they accused Quattrone in 2003 of hindering their probe of Credit Suisse, Switzerland's second-largest bank. They said Quattrone endorsed a subordinate's e-mail in December 2000 advising employees to "clean up" nonessential files.

The prosecutors claimed that the e-mail suggested employees should destroy incriminating records and that Quattrone knew a grand jury was investigating the bank. Quattrone denied wrongdoing and admitted none in the accord.

After learning more about the forwarding of his colleague's e-mail, the bank put Quattrone on administrative leave. He quit in March 2003.

He endured a hung jury in 2003, a conviction by a new jury in 2004 and imposition of an 18-month prison term, but the verdict was overturned on appeal.

His agreement Tuesday ended the threat of another trial on the same charge.

The appeals court dismissed his conviction because of improper jury instructions by the judge, but found sufficient evidence to present the case to jurors at a retrial.

That ruling was not the first obstruction-of-justice conviction overturned in a prominent corporate case. U.S. prosecutors won an obstruction-of-justice conviction of Arthur Andersen LLP, once the world's fifth-largest accounting firm, for shredding documents related to the collapse of Enron Corp. But the Supreme Court overturned the conviction last year, and prosecutors did not pursue a retrial.

The appellate ruling on Quattrone toughened the standard for proving obstruction cases, which may have affected the U.S. decision to abandon a third Quattrone trial, said attorney Andrew Weissman, who prosecuted Arthur Andersen for the government.

"The government now does have to prove that people knew it was wrong at the time the alleged obstruction occurred," said Weissman, now at Jenner & Block LLP in New York.

Nevertheless, prosecutors sent a message via the Quattrone case that they will not tolerate obstruction of investigations.

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