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interview: susan pulliam and randall smith

What is being investigated by the U.S. Justice Department and by the SEC?

Randall Smith: The two main areas are oversized commissions in exchange for IPO allocations, and aftermarket orders, which are either firm orders or loose agreements to bid more, pay more, after a stock comes public as part and parcel of the process of the IPO.

And what's wrong with [the aftermarket orders]?

Randall Smith: It could be construed as something that could push the price up after it starts trading in some kind of prearranged way that would violate securities laws.

But in this hot IPO market, all those IPOs were put out there at very low prices, and they were popping like crazy [i.e., shooting way up in price on the first day of trading]. Why would price manipulation even be an issue?

Randall Smith: There's a school of thought that some of these aftermarket orders did contribute to the size of the pop. And as the system became more evolved, it was almost like a choreographed pop, where it became common for both hedge funds and other investors, as part of cementing an order for an IPO, to also make some kind of commitment that they would buy more stock after it started trading at a much higher price.

So you think that actually contributed to manipulating the process in the IPO and driving the price up?

Randall Smith: Manipulating is a legal term, and I wouldn't want to draw a conclusion about that, because that's what the regulators are looking at. But it would certainly tend to move the stock in that direction, sure. ...

Susan Pulliam: One of the things that's really interesting about this case is that it involves practices that have been around for years. I mean, this is sort of standard operating procedure in the IPO process. You've allocated shares to your best clients. And, often, as an indication that they were a good client, they'd buy in the aftermarket.

But the thing that I think regulators are looking at is whether or not industry practices crossed over a line and these agreements became something that violated securities laws during the big IPO boom.



Smith and Pulliam, staff reporters at The Wall Street Journal, broke the story of the federal investigations into IPOs in December 2000 and have covered the ongoing developments ever since. [See a timeline of the major developments in the IPO investigations.] In December 2001, they reported that Credit Suisse First Boston had agreed to pay a $100 million settlement, the fifth largest in Wall Street history, to resolve the SEC's investigation into CSFB's alleged IPO abuses. FRONTLINE producer Martin Smith interviewed Smith and Pulliam in late August 2001, and website managing editor Wen Stephenson spoke with them in January 2002.

Define that line. ... It's always standard practice that you allocate shares to --?

Susan Pulliam: The IPO process, who gets IPO shares, has always been an unfair process. IPO shares have always gone to Wall Street's best customers. But the question is whether or not Wall Street began demanding something in return because there were so many good customers lined up to get these shares.

The IPO allocation process has always been one of the most closely guarded on Wall Street, because it basically amounts to doling out free money to people. So the banks would be able to get what? Where would they cross a line?

Susan Pulliam: The line as the regulators seem to see it is whether or not there was a quid pro quo. If you're demanding payments in exchange for an IPO allocation, that crosses over a line that may violate securities laws.

But hasn't that also gone on for a long time? ...

Randall Smith: The difference in this case is that there were these enormous first-day gains taking place routinely that amounted to free money that the brokers had to dole out. And so instead of just allocating them to their best clients, without regard to anything else, they took it a step further and said, "In order to get these allocations, you've got to pay us." And they laid out specific terms -- either in flat dollar figures or, the allegation is, in percentages of the profits -- which basically gave the brokers extra commissions that went over the 7 percent which they advertise as the fee they charge for an IPO. ...

Is that an issue of fraud, if they're getting more than the 7 percent that the prospectus states that they're getting?

Randall Smith: One of the issues in the probes by the NASD [National Association of Securities Dealers] and the SEC [Securities and Exchange Commission] is, did this constitute undisclosed and excessive underwriter compensation?

So to get your free money, it really does have to do with this being a sure thing, that these stocks are going to pop? I guess what you're saying is that's where you get the abuse.

Randall Smith: Yes. It's like, nature abhors a vacuum. If you have something of value to hand out, in a Wall Street culture, you're going to try to get something in return. And whether it's legal or illegal is something for the regulators to decide. ...

In previous Wall Street scandals, you've had marginal players; or one house goes off the deep end. But here it seems we have the biggest names on Wall Street. Does this make this larger and different than other investigations?

Susan Pulliam: I definitely think that we're talking about practices that were very widespread. They weren't at all limited to one firm or one group of individuals in a firm. So, yes, it potentially could involve a lot of firms. At the moment, regulators have seemed to focus on Credit Suisse First Boston. But that could change.

Why the focus on Credit Suisse? What's the reason for that? Can you tell me from the very beginning what sparked the investigation?

Susan Pulliam: ... Our understanding is that it started with a routine exam of First Boston by the Securities and Exchange Commission. And then it grew from there.

And when was that?

Susan Pulliam: It would have been in [mid-] 2000.

Fortune magazine talks about an e-mail coming in from a disgruntled hedge-fund manager. He said he was being asked to pay excessive commissions by CSFB. And that's what sparked it.

Susan Pulliam: There were anonymous letters, as we understand it, to the SEC. ...

And as they looked further ... people knew that Frank Quattrone [CSFB's head of technology banking] was running a house [out in San Francisco] that was different than the other houses. But that wasn't contributing to their looking at them harder? You say it just came about in a routine investigation. Nobody was concerned about the way in which Frank Quattrone was controlling his analysts, for example?

Randall Smith: ... When you talk about how Credit Suisse First Boston was different from other firms on the street, you would be able to point to the autonomy that was given to the various business units, including the Quattrone technology group. But you would also talk overall about the firm being a somewhat more free-wheeling culture, by the nature of its ownership in Switzerland and the history of having stars ... who were really the top of their sector. [They] were given a lot of latitude to run their business the way they wanted to. And in some cases, like Frank Quattrone, [they] were given shares of the revenues, or shares of the profits.

How was it that Frank Quattrone came to be chief of technology banking at Credit Suisse First Boston, and what kind of house [did] he set up?

Randall Smith: The thing that distinguished First Boston here is that they did have the foresight to hire the best technology banker in the business just before this enormous boom in technology stock issues. It literally took the firm from being an also-ran in stock underwriting to the very top in the rankings. They were one of if not the leader in underwriting new Internet issues -- but also other kinds of tech issues. Quattrone had been in Silicon Valley for nearly 20 years, had been dissatisfied with a couple of other places he'd worked, and joined Credit Suisse right in the middle of 1998, right as the boom took off.

He actually was there at the beginning -- at Morgan Stanley, he took Netscape public?

Randall Smith: Right.

So he was there at the big bang. And then how did he set up his house?

Susan Pulliam: Unlike a lot of other technology investment bankers, Frank Quattrone had an inclusive shop where he had a venture capital arm that he ran. He had his own research group. He had his own brokers. So that distinguished him from his peers.

What's the significance of having that autonomy and that sort of vertical integration?

Randall Smith: It makes it tougher for the parent company to monitor the details of how they're doing business. If you've got your own budget for promotion, your own budget for lawyers or whatever, you can pretty much operate on your own. And the ability of the front office to exercise oversight and control is limited by that.

What kind of guy is Frank Quattrone?

Randall Smith: He's a funny, engaging, charming guy. And that's one thing that helps him win business. He's built a big franchise out in Silicon Valley by getting to know all the venture capitalists. ... And even down to the ability to tell a good story on the cover of a prospectus, of what problem a company was designed to solve -- he is the master of that process as well.

But the thing that people come back to most often when they're talking about Frank Quattrone is control -- that he's a control freak and wants to be involved in every step of the process. That reputation is one of the things that has put a cloud over him because of Credit Suisse First Boston firing three of his brokers. ...

Susan Pulliam: Frank Quattrone has also cultivated an image that's very different from a typical investment banker. He is well known for wearing goofy sweaters with, you know, ski scenes on them. And he has a bushy mustache. And I think he really identified much more with the Silicon Valley entrepreneur than with his investment banking cohorts back in New York. That stuff's not insignificant in terms of the way people see him.

And how successful was he?

Susan Pulliam: Enormously successful in building relationships with entrepreneurs out in the Valley, where he'd been for years, before any of the other investment banks decided to move out there. He'd been there and planted his pole very early in the process. So he saw himself, and I think was also seen, as one of them, much more than other investment bankers who would jet in for a day or two and then jet back to New York and didn't really understand the Silicon Valley mindset like he did.

You refer in one of your stories to the "Friends of Frank." Who are the Friends of Frank? What's that a reference to?

Susan Pulliam: "Friends of Frank" typically refers to the group of technology entrepreneurs that he had developed relationships with, in addition to the venture capitalists that he worked closely with over the years. ...

Randall Smith: One of the perks of being a "Friend of Frank" was you got to invest in some of his deals or, in some cases, all of his deals.

What does that mean, "You got to invest in his deals?" Anybody can invest in his deals? Or not?

Randall Smith: No. If you and I went to our broker and tried to get an IPO allocation, we would be told, "Gee, maybe," or "Probably not." But a hedge fund that would generate a lot of commissions might have a chance to get an IPO allocation. And similarly, part of the process of being a client of Credit Suisse First Boston was that you would have a better shot at getting shares of some of these IPOs that were skyrocketing in price.

Can you give an example of that?

Randall Smith: VA Linux is a case where one of Frank's best clients, Jay Hoag of TCV -- Technology Crossover Ventures -- got 50,000 shares, which is a pretty large allocation considering [the VA Linux IPO] set the record for the first-day price gain.

Why did Jay Hoag get that allocation?

Randall Smith: Because he was probably among the handful of Frank Quattrone's best customers. I think he was regarded as somebody who, for investment banking purposes, they wanted to keep happy. And this was one way to do it.

Why does he want to keep him happy?

Randall Smith: Because Technology Crossover Ventures would have any number of companies coming public. They're a venture capital fund, and they invest in companies before they go public. Jay Hoag has said that more of the companies that went public with investments by his fund were underwritten by Frank Quattrone and Credit Suisse First Boston than any other investment bank. ...

And [Jay Hoag] told you that he had received the 50,000 shares?

Randall Smith: Not him personally, but his firm, Technology Crossover Ventures -- yes. ... The hedge fund and some of the venture funds that he managed. Technology Crossover Ventures has, I think, more than one venture capital fund as well as a hedge fund. What he told me was that the shares went into all of those funds on a pro rata basis.

...

When you talk to members of the public or friends or whatever, what do you encounter in terms of their perception of how the game was played, and what you are now uncovering as to how it really was played?

Randall Smith: ... I would say that this -- the IPO allocation process -- has always been one of the most closely guarded on Wall Street, because it basically amounts to doling out free money to people. In the past, the free money was not as great as it was in 1999 and in 2000 because the average first-day gain of an IPO might have been 15 percent or 20 percent. All of a sudden, during the dotcom boom, first-day gains of 100 percent, 200 percent, 300 percent were routine. So what had been a fairly arcane, closely guarded process -- but of great profit potential -- suddenly became this key to huge riches that everybody wanted to get a piece of.

What's wrong with Jay Hoag's company, TCV, receiving 50,000 shares of VA Linux? Is there a problem?

Susan Pulliam: No. I think that one of the interesting things about this case and one of the difficulties for regulators is that I think everyone's understood -- even the general public -- that IPO shares have always gone to Wall Street's best customers. So the challenge for regulators is whether or not those practices of giving shares to the best customers transformed into something that broke securities laws. It's an interesting question, and I think a challenging one for the lawyers involved.

But isn't there a public relations problem that Wall Street also faces, even outside of whether laws were broken? When you have the promise of the Internet, of democracy, of equal access to information and a level playing field, and then we find out many in the public didn't know that there was this sort of inside game with IPO shares, with this free money -- suddenly they read your pieces [in The Wall Street Journal] and see that all the advantages happened before the market bell rings.

Randall Smith: One of the reasons for the backlash against Wall Street, obviously, is that the people who were doing the buying after the stocks had gone up were mainly individual investors who then proceeded to see the stocks go down en masse and routinely lost 80 percent or 90 percent of their money. ... Some of the reaction to these practices, I think, is accounted for by the huge losses suffered by the investors.

And the education they're getting in how the insiders played, how the whole game was played before [the public] even had a chance to buy in?

Susan Pulliam: Right, yes. One aspect of the case, if there is one, will probably be to what extent Wall Street was motivated to bring some of these companies public at all by some of these side deals that they had. The investment bankers, we've found now ... were, in many cases, making investments in the company just before they went public.

Personally?

Susan Pulliam: Personally, yes. ... And all of that raises the question, was Wall Street to some extent motivated to bring some of these companies public by those arrangements?

That is a very key question. ... Explain.

Susan Pulliam: We don't ultimately know, obviously, what case regulators might bring. ... I'm guessing now, but I think that one of the reasons regulators are looking at this at all is a question of whether or not some of these companies should have been brought public in the first place. I mean, [whether] the commission structures that we're finding out they had were in effect an attempt to line their best customers' pockets and then get some of that back themselves. And if they weren't able to do that ... would this stream of companies into the IPO market have happened?

Randall Smith: ... It's not a black-and-white thing whether a company's ready to go public. Part of what goes into the decision is how are the stocks doing. And in an environment when the stocks were doubling and tripling on a single day, it's easy to think that a company that's essentially just a web site and a prospectus and a gleam in somebody's eye should be public.

...

Could you explain the mechanics of [the investigation into aftermarket orders]?

Susan Pulliam: ... There are a number of discussions that go on between investors and their salespeople prior to an IPO, where they talk about how much they're interested in buying. And the salesperson comes back and gives the investor an indication of how much interest there is in the deal and whether it might be over-subscribed.

As part of that discussion, they talk about how much they might be willing to buy after the shares start trading, or what kind of an aftermarket order they might be interested in putting in. It's not a formal agreement. There's nothing in writing. But there are certainly, I think, discussions that go on in every deal like that.

Is there anything wrong with that?

Susan Pulliam: It's sort of an interesting question. I guess that I don't think anyone would say that there's anything wrong with an investor saying you're interested in buying more of the stock after it begins trading. I think that the way regulators look at it is, if the investor's understanding is that they won't get IPO shares unless they buy a certain number of shares after it begins trading at a higher price, maybe that does constitute an agreement. And that would violate securities laws. ...

Randall Smith: The line that they can't go over, they can't say, "I will promise to buy x shares up 5 from the IPO price," because that constitutes a prearranged trade. You're not allowed to do that in the course of the IPO, because it's essentially manipulative. If you do enough of it, you can make the price go up. And that's a no-no.

If you arrange for enough aftermarket purchases, you can actually be manipulating the price of stock?

Randall Smith: You can know for sure, based on the orders you've got in your book -- if they're firm orders -- that the stock is going to go up 5. ... It's one thing to have indications of interest to buy in the aftermarket. But if you have firm orders to buy set numbers of shares at a set price that's higher than the IPO price, that is a violation. And the SEC reminded investors of that in the middle of 2000, because they were hearing reports that that rule was being violated. ...

So those prearrangements actually create kind of a bubble where the air can just rush out of them because there's no real demand?

Randall Smith: It doesn't appear that you can literally create a bubble just by those kind of prearranged deals. But I think you can definitely say that they turn the heat up on the whole phenomenon.

...

How important are IPOs to banks?

Randall Smith: ... One of the characteristics of this period, or bubble -- or whatever you want to call it that we just went through -- is that a much higher percentage of Wall Street's work was being done with these tiny untested new companies that were just coming public.

The obvious incentive Wall Street has for that is that IPOs are literally their most profitable business. They get 7 percent of the value of the IPO. And they also get a lot of, as we've seen, extra commissions and ancillary trading that follows the IPO. ...

Wall Street will make money anywhere they can. And from time to time, there are other areas that spring up that might be more profitable. But in general, initial public stock offerings are Wall Street's most profitable business.

So in total, what did this mean for Wall Street -- to be seeing this enormous number of IPOs?

Randall Smith: Oh, it was the most profitable period in Wall Street's history. ...

What [responsibility] do banks have in taking these companies public? ... Was it appropriate for them to be taking all these companies public? ... I mean, this is the very backbone of Wall Street that's being looked at.

Susan Pulliam: Right. I think when you talk to investment bankers about the attitude that was pervasive at the time, they all admit now that there was a sort of "close your eyes and forge ahead with these offerings" kind of an attitude.

But banks have been asking us to trust them for a long time. All the commercials are about trust and integrity. Then suddenly, they're bringing all these companies public that have no profits. Some had no revenue. Did they breach that public trust, even beyond whether or not they violated laws?

Susan Pulliam: I think one of the roles Wall Street, as an important intermediary, is expected to play is one of making sure that it doesn't bring securities to market that have no business trading publicly. I guess there's a question here whether or not they performed that role.

Your ear is to the ground. You're on Wall Street. You're talking to people. Is there a mood there of self-examination or reflection on this period?

Randall Smith: I've been surprised by the degree to which they seem to want to try to change some established practices, such as analyst conflicts. The IPO allocation practices -- it's unclear the extent that'll change. I think people are going to be a lot more careful in the future about side agreements or agreements to get extra commissions where they're not supposed to get them, because they can look like kickbacks. ...

It is actually somewhat unusual for big firms to find themselves under an investigation of this nature, involving kickbacks or manipulations, because they know in general what the rules are. And it's a function of how wild this era was in 1999 and 2000 that the stocks just broke through all the conventional yardsticks. And I think that, even though people knew in general that there were these rules, it was easy to lose sight of them in the frenzy.




Editor's note: FRONTLINE conducted a second interview with Randall Smith and Susan Pulliam on Jan. 10, 2002.

In your Dec. 11 front-page story in The Wall Street Journal you reported that Credit Suisse First Boston has agreed to settle with the SEC for $100 million to resolve the investigation into the alleged kickbacks, or excessive commissions, paid in exchange for IPO allocations. And you reported on Nov. 29 that the criminal investigation by the U.S. Attorney's office was being dropped. Where do the settlement negotiations with the SEC stand at this point?

Randall Smith: Well, they have to agree not only on the dollar amount of what they're going to pay, which is the main thing they've already agreed to, but they also have to agree to the exact thing that they're going to charge them with. Is it going to be "failure to supervise?" Or a "books and records" violation? Or improperly sharing profits with customers? Or on up the line. The one thing we don't think it will be is fraud because that could cause them all kinds of problems in terms of getting new business and being able to continue doing business with various customers. So we think it will be some sort of lesser charge, less than fraud, but it will include this $100 million in penalties. ...

Is CSFB under any other investigation that you're aware of, or will this clear them with the SEC?

Susan Pulliam: Yeah, I think they'll be done with this investigation.

Randall Smith: The one loose end is that the regulators will still be free to pursue cases against individuals at the firm. The individuals were hoping that somehow or another ... this would be it for them too, but that's not the case.

What about Frank Quattrone? Is the heat off of him? Does he have anything still to worry about? Obviously, he's not the only individual here who might be subject to further investigation. But where does he stand?

Susan Pulliam: We don't really know the answer to that. But our best guess is that he probably is off the hook. ...

There's been so much focus on Quattrone, because he became this larger-than-life figure in the Silicon Valley investment community. Do you think that this has changed the way he operates? I mean, it's a completely different business climate than it was two years ago. But do you think thev've been chastened out there? And has this really affected Quattrone's reputation on Wall Street and in the Valley?

Randall Smith: I think that [CSFB's] sales organization and the brokers are the ones who have come under the most scrutiny in terms of the regulators. And he has been able to make the case that this whole process, with the kickbacks and the commissions, was something that took place outside his view. There was always some question, because he was a control freak and wanted to know everything about everything that happened, and they were his deals, and it was his firm, and he had a lot of freedom. So I think there will always be some question as to the style of his operation. They have definitely reigned in his independence. They've totally changed his pay deal so that he's not paid based on a formula. They've taken his analysts away; now the analysts report to New York. And the group is obviously a good deal smaller, because the business has shrunk [as a result of] the dotcom bubble bursting.

So there have been already a lot of changes in how he operates. But, you know, I think clients will probably give him the benefit of the doubt, with the firm's endorsement. ... But certainly the kind of freedom that he enjoyed is a thing of the past, at least at this firm.

Susan Pulliam: And, you know, IPO business was obviously way down this year, but [CSFB] really did suffer more than most through this investigation. So I do think his reputation has been damaged by it. Even though he's not going to face any charges, I think people will remember this. I think he's got a little black mark by his name in the book. We would hear anecdotally about clients not wanting to get anywhere near him while this was going on.

Do you think it's fair that he became a kind of poster boy for the excesses of the bubble?

Randall Smith: Well, I think you couldn't avoid it, because he was the guy who had brought all the deals in ... the deals that they did get, in some way or another, kickbacks on. And the degree of his knowing about that and participating in that is not something that we know right this second. The organization itself had a lot of problems, and the chief executive of the firm, Allen Wheat, basically got fired over this. I think it was reasonable to write a story about him as the guy who had brought all these deals in.

Susan Pulliam: But you're talking about him being a poster boy of the whole [bubble], not just the investigation itself? ... Yeah, I do think across the street there is agreement that CSFB brought more companies with weak business models to market than anybody else. Go talk to former employees and it's amazing the number of companies that they can rattle off where the business model made absolutely no sense. I think the underwriting standards there declined in a way that they didn't anywhere else on Wall Street during the bubble. So I do think it's absolutely fair game. ...

Now, the investigation into aftermarket orders, or "laddering," is still ongoing. Do you have an update on where that stands?

Randall Smith: We had a story in December, I think a few days before the CSFB settlement story, that said that there were four other firms [Goldman Sachs, Morgan Stanley, J.P Morgan Chase, and Robertson Stephens] that were the focus of the aftermarket order case. That's still true, and we're still hearing about subpoenas going out from the SEC to companies about this very stuff, even over the Christmas holiday. ...

Can you explain why the criminal investigation was dropped by the U.S. Attorney's office? What were they looking for that they couldn't find? And was the criminal investigation, just to clarify, was it into the kickbacks (i.e., the excessive commissions) or was it into the prearranged aftermarket orders (i.e., "laddering")?

Randall Smith: Just the kickbacks. ...

Susan Pulliam: One of the difficulties for regulators who were trying to pursue this case was that legally it was a challenge. There really was no precedent for them.

But it was difficult, I think, for both the SEC and the U.S. Attorney to figure out just what law applied to this. And I think they looked at commercial bribery as one possibility, and there were problems with pursuing the case under that kind of a legal strategy. I don't really understand exactly why it didn't qualify as bribery, but apparently there was some reason.

Randall Smith: I think the brokers were able to argue that they thought this was okay. They were just getting extra commissions and that was what they were supposed to do. And if you're a prosecutor, you have to be able to show pretty clearly that the person in question knew that what they were doing was wrong.

But very specifically, they were looking for some kind of hard evidence?

Randall Smith: Presumably. They never found a bag of cash under the Brooklyn Bridge, where it would be like "smoking gun" evidence of bad conduct where there was a clear understanding by both sides that what they were doing was wrong. ...

How about the class-action suits? There are over 1,000 suits involving 263 IPOs?

Randall Smith: Right. ... Almost every IPO that went up in price, and probably some that didn't, have been sued by some investor somewhere because most of the stocks eventually went down, and people could say they lost money and there was this bad conduct and therefore they are owed something. ...

Is there a sense, word on the street, of what to expect from all this in terms of the outcome? Should we expect to see some big damages?

Randall Smith: [There's] some speculation that CSFB and the other firms will likely have to pay a good deal. ... I think the presumption is that they will have to cough up a substantial amount in addition to the [SEC settlement] because the investors will be able to say they were harmed by some of this.

Susan Pulliam: That's also one of the things that is included in the settlement talks. CSFB is going to want to try, as much as it can, to close the door to the class-action lawyers.

How would they do that?

Susan Pulliam: Well, keeping fraud out of it, to begin with. ...

In other words, by not admitting to anything specific, like fraud, that directly affects what a class-action suit might be able to --

SP: Yes, it makes it harder for them. ...

Regarding Harvey Pitt, the new SEC chairman appointed by President Bush. It's been pointed out by various people that he built his reputation as a lawyer defending those who had run afoul of the SEC, such as Ivan Boesky in the 1980s, and that he's served as a lobbyist on behalf of Wall Street interests. How is he viewed on Wall Street? Any thoughts on his reputation and what he brings to the job of SEC chairman, and how he differs from his predecessor, Arthur Levitt?

Susan Pulliam: Well, I do think that, in his defense, he's considered a really excellent lawyer. ...

Randall Smith: He does know how the business works.

Susan Pulliam: Yeah, the lawyers who work at the SEC obviously really respect his lawyering ability. I think he's going to have a very different kind of agenda than Levitt. Levitt was a very populist kind of a guy, who saw himself as the champion of individual investors, and I don't think that's going to be Pitt's hallmark. What it's going to be is sort of unclear. ... He wants to do "real-time enforcement," where enforcement actions come closer to the wrongdoing rather than having investigations drag on for years and years. I think that's helped bring this case to fruition more quickly.

Randall Smith: I think he'll become known by the kind of cases he brings and the things that he emphasizes. ... The one thing he said was that he wanted to work with companies and reward companies that turned over their own damaging information to the commission. And people have interpreted that as being, in some way, cozier with the companies. But I don't think we can tell until we see the kind of cases he brings. And I think he's certainly so sophisticated in his knowledge of how the business works that if he really wants to, he can bring some pretty good cases. But you won't know until you see his record.

He's not as big on the rhetoric, for sure, as Arthur Levitt.

But his appointment did raise some eyebrows?

Randall Smith: Well, look, Bush is a Republican and Republicans are known for being friendlier to business. So I guess I would see this in that context. ... It's not surprising that a Democrat would have a fire-brand populist in the job and that a Republican would have a guy who's an inside player. ...

In your page-one story on Dec. 11, there's a reference to the possibility of "new rules that can help level the playing field for small investors," and that regulators could be set to "rewrite the playbook for IPOs." Does that still seem likely? First of all, what kinds of changes, specifically, are we talking about, and how likely is this to happen and when?

Randall Smith: Pitt did give an interview. There was a Bloomberg story [on Dec. 31] where he said, this is a quote, "After we've completed our work on the enforcement phase (involving) violations of existing rules, we will then put out some proposals for how in the future these issues ought to be dealt with." So he is publicly saying that they do plan to do that. We don't know when and we don't know exactly what rules they're going to put down. He talks about concern about preventing practices by underwriters to affect the price of new stocks after they start trading. He said, this is a quote, "Anything that attempts to channel a market's response to a new offering would be areas of concern for us. ... There may be lack of clarity in how firms should allocate new offers and what the aftermarket ought to look like." ...

So again, that sounds more like it's addressing the aftermarket orders than the commissions.

Susan Pulliam: Well, when I've talked to [Pitt] about this, he said that in terms of the commissions, he wants to deal with the ethics and fairness rules. So I don't know what they would do ... but I think they're going to [deal with] what kinds of commissions you can accept. ...

Where do you think the story goes from here? Has Wall Street returned to a kind of pre-bubble normalcy? Do you think that the issues raised by this episode are going to be in front of the public for a long time?

Randall Smith: Well, I think they are going to be a lot more careful in the future, undoubtedly, about how they handle IPOs and what they get for IPOs and how they stage-manage the process and stage-manage the price after the IPO starts trading. That's for sure, because I don't think they had any idea that this kind of conduct would be investigated as thoroughly as it has been.

Now, on the other hand, Wall Street really likes bubbles. Bubbles are good for the Street. They make a lot of money during a bubble, so I'm sure that if they have a chance to pump some additional air into some bubbles in some market sector, they will happily do so again, because that's how they make their money.

Susan Pulliam: ... Wall Street is a much more sober place right now. Whether you talk to investors or investment bankers or analysts, it just is a different kind of environment. It's not nearly as exciting. There isn't something really amazing or breathtaking or startling happening in the market everyday.

Looking back on all this 50 years from now, are the IPO investigations going to be seen as a significant chapter or as a footnote in Wall Street history?

Susan Pullliam: We hope that the investigation will be more than a footnote. I think in time, when people look back on the bubble, they'll also mention that there was this under-the-table game that was being played that was ultimately very unfair for the investors who were buying these stocks.

Randall Smith: Both in restricting their access to the IPOs because of the kickbacks being paid by the guys who were getting them, and also because the aftermarket orders would inflate the prices after they started trading.

In the 80s, the Boeskys and the Milkens came to characterize a certain period on Wall Street. Do you think there's anything similar here? When we look back on the late 90s, is it going to remembered as a corrupt era on Wall Street?

Susan Pulliam: I think one of the differences between this and the insider-trading scandals of the 80s is that [this time] individual investors shared a lot of responsibility for what happened. They obviously made the decision to put their own money into these stocks, so there's a lot of shared blame in this case. But I think Wall Street's reputation is somewhat affected negatively by the bubble. Analysts also haven't come out of this looking very good. And that's not really a story that Randy and I have followed too closely, and ultimately I don't think that there are going to be any -- and this is a guess now -- but I would be surprised if there would be any regulatory actions against analysts for that, for their conflicts. But I think that taken together with the IPO investigation that we've covered, I don't think that Wall Street comes out of this looking too good.

Randall Smith: I think the comparison with Boesky and Milken, who were the characters from the 80s who were the really larger-than-life guys -- I mean, Boesky did pay the "bags of cash," and I do think that is one difference. Even though CSFB as an organization may have had some practices that were corrupt or improper, I don't think it was quite at that level. I think it was just a question of laxity on an organizational level and not deliberate criminality. ...

Susan Pulliam: Yeah, I think this case underlined the unfairness to individual investors of some of these longstanding practices on Wall Street. CSFB clearly was doing something that was different than its competitors, but all Wall Street firms did this to some extent.

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