For Wall Street, signs that the '90s are over

In the 1990s, investment bankers were the nation's equivalent of royalty, dispensing wealth and deciding which companies would get the billions of dollars chasing hot stocks.

Now, the times have changed for the pinstriped set. One of the biggest dealmakers has been convicted of crimes associated with the go-go age. The year's biggest deal, the public offering of the Internet search engine Google, has rejected some of the traditional methods used by Wall Street. And the New York Stock Exchange, the bastion of the dealmakers, is involved in an embarrassing attempt to get back millions of dollars given to its former chairman.

In brief, Wall Street is no longer Camelot.

"Have the times ever changed," says Michael DeMarco, a partner at Kirkpatrick & Lockhart LLP in Boston. "It's cleanup time for the 1990s."

The latest evidence of this came on Monday when a federal jury found former investment banker Frank Quattrone guilty of obstructing a government investigation. The government had been looking into the allocation of shares of Initial Public Offerings (IPOs). In the height of the IPO boom, the shares of many of these high-flying companies were offered as inducements to CEOs to bring their business to the investment bankers.

"There was the appearance that shares were doled out on a quid pro quo basis, which is not the way things are supposed to work," says Michael Gass, a partner at Palmer & Dodge in Boston.

Mr. Quattrone's conviction follows Martha Stewart's guilty verdict. The style-doyen was found guilty on March 6 of lying to federal officials who were investigating an insider trading case.

Still more trials are either ongoing or will be taken to juries. A jury in New York is hearing the case against the Rigas family, accused of looting the assets of cable television operator Adelphia. On April 2, a mistrial was declared in the case against the executives of Tyco, Inc. That case is expected to be retried.

And the government recently indicted Bernie Ebbers - who headed up World Com before it went bankrupt - and Jeffrey Skilling, former CEO of Enron.

Many defendants will probably find an American public that is unhappy with the alleged abuses. Some defense lawyers believe a "class war" is taking place. "You're seeing the feeling that anyone with a title must be guilty," says Jamie Wareham, a partner at Paul, Hastings, Janofsky & Walker in Washington. "There is a backlash against the super wealthy."

The Quattrone case, defense lawyers believe, is an example of this. Two days after learning that the government was investigating the way IPOs were sold, Quattrone endorsed a colleague's message to "clean up those files."

To the government this was obstruction of justice. After his first trial ended with a hung jury, the government retried him. However, Quattrone, despite all his salesman's charm, was not a sympathetic defendant.

In 2000, Quattrone earned $120 million when he managed the underwriting of such hot companies as Amazon.com and Netscape Communications. Unfortunately, after the Wall Street bubble burst, such companies watched their stocks drop. "A lot of people know of a lot of other people who have lost a lot of money," says Mr. Wareham, who is often involved in securities cases.

The shift in public opinion is mirrored to a certain extent in the securities markets. Last week, Internet search organization Google announced it would do an IPO. However, unlike the 1990s, it will use a "Dutch auction" system, which allows individuals to place their own bids for shares. This tends to give a much broader distribution of the shares and hold down some of the sharp run-ups in price. It will also minimize the role of investment bankers. "I don't think it's ever been done for such a high flyer," says Mr. DeMarco, a former state prosecutor.

Changes are also taking place in the securities laws to prevent future abuses. New rules prohibit securities analysts from talking to the investment bankers involved in new securities offerings. During his trial, prosecutors presented evidence that Quattrone was involved in the allocation of some of the hot IPO shares. "Quattrone would not have had the same input today," says DeMarco who notes that every day he receives a half-dozen e-mails about SEC rule changes. "It's all part of the attempted cleanup of the financial services industry," he says.

Some of that effort is still on-going. New York State Attorney General Elliot Spitzer, who has spearheaded many of the cases, is still investigating some of the mutual fund abuses and has now turned his attention to the insurance industry. At the same time, Spitzer is involved with the venerable New York Stock Exchange to try to get back some of the remuneration that was paid to Richard Grasso, the former chairman. Mr. Grasso received over $140 million as part of his retirement package. "The exchange went back to Grasso and said, 'You got paid too much, the whole pay thing smells of an inside job,'" DeMarco says.

Once the dust settles, the financial markets will be in better shape, contends Mr. Gass. "The old assumptions about how people went about their business are out the door. We have a much more energized environment."