Confessions of a Wall Street Analyst (46 page)

On October 7, David and two of his associates grilled me for three hours, aggressively jabbing me with a nonstop series of questions. They included the following:

The lawyers were satisfied with my answers, it seemed. They also really liked my contract because it didn’t tie my pay to banking. So, once again, did I.

Three days later, we had a similar session at Davis Polk, where I was interrogated even more aggressively in preparation for what might lie ahead. At this meeting, my attorney, David Fein, told me that the NASD had asked for copies of all my e-mails between July 1999 and July 2001 and that Eliot Spitzer’s office would get copies of them as well. It’s terrifying to think of someone else going through every thing you’ve put in writing for the past few years in the hope of finding a smoking gun. I couldn’t help but feel violated, even though I understood why they needed to do it. But I wasn’t very concerned. I told David I didn’t have any incriminating e-mails and I was happy to help. I had thought they asked all of the right questions, with the exception of the biggie: inside information. No one, apparently, was pursuing this topic.

So I was pretty surprised a week or so later when the phone rang and it was David.

“What’s a Level 3?” he asked nonchalantly.

It turned out that the paralegals at Davis Polk had been assigned to read all of my e-mails, looking for anything incriminating, such as a situation where I privately criticized a stock while recommending it in my reports. They found an e-mail I wrote to Frank Quattrone, dated October 10, 2000, that read:

“Enough. I gave on Level 3 and that’s it.”

From a paralegal’s perspective, this sure sounded juicy. Wasn’t there a numeric stock rating system at CSFB where “1” equals Strong Buy, “2” equals Buy, and “3” equals Hold? It sure sounded as if I had caved by rating some stock a Buy or Strong Buy when I believed it should be a (level) “3.”

What actually had happened, I explained, was that after CSFB merged with Donaldson Lufkin & Jenrette in 2000, DLJ’s Internet analyst, who had previously covered Level 3, the Internet/telecommunications company, and another startup local telecom company, Metromedia Fiber Network (MFN), wanted to continue covering both of them.

Frank Quattrone was in the highly unusual position of being a banker who had the technology research team report directly to him. So he e-mailed me and asked if I would be willing to transfer coverage to the new guy. I was more than happy to give up Level 3, since I wasn’t going to cover it anyway, but told Frank that it made no sense for MFN to be covered by anyone but Mark Kastan. Hence my e-mail.

Those poor paralegals. They had stayed up all night going through my e-mails and finally thought they had caught me! David and I had a good laugh at a time when not many people were laughing about anything. That was the end of the exchange and the last thing the lawyers asked me about. I never heard from any of the investigators on the analyst independence issue and still haven’t to this day.

Sex, Lies, and Videotape

The next round of congressional hearings began on October 1, 2002. Joe Nacchio and Gary Winnick were summoned to testify. Also testifying were several Qwest and Global Crossing employees who had lost their life savings investing in their company’s stock. “I’d like to congratulate Joe Nacchio on
taking—having taken such good care of his children,” said Paula Smith, a woman who had worked for US West, the predecessor of Qwest, since 1980 and who had seen the $240,000 she’d saved for her daughters’ education wiped out. “I really wonder if he would be willing to help me educate my children.”

Gary Winnick, who looked bloated, either from too many cookies or with misplaced pride, was next up. The committee members excoriated him for his stock sales on May 23, 2001, not long before the meeting I hosted with Global Crossing that called into question the sustainability of the company’s revenue growth. He denied having any inside negative information and then, in a masterful public relations move, announced that he would contribute $25 million to restore some of the 401(k) losses suffered by Global employees.

The congressmen, who moments ago had been thirsting for Gary Winnick’s blood, went silent. How could they beat up a guy who just gave $25 million of his own money to their poor constituents? Never mind that those Frontier and Global Crossing employees had lost hundreds of millions of dollars and that $25 million was peanuts for him, only 3.5 percent of the over $700 million of Global Crossing shares he had sold before the stock crashed. When Joe Nacchio, who had himself cashed out of $216 million in salary, bonus, Qwest stock, and options between 1999 and 2001,
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was later asked whether he would do the same, he dodged the question. Qwest, he reminded everyone, was not bankrupt—though its stock was now selling for less than $2 per share.

Watching the spectacle of these hearings made me more convinced than ever that it was time for me to phase out. After Ehud left, it hadn’t been clear who should succeed me. Though Ido and Julia were well qualified and perfectly positioned to do so, there was concern from the top brass that they didn’t have enough experience yet. So the decision was made to ask Lara Warner, CSFB’s cable TV analyst, who had been Blake (“Bloodbath”) Bath’s assistant at Lehman Brothers several years back, to become CSFB’s senior U.S. telecom analyst. I thought it was a good idea. Lara was already at CSFB, and she had worked at AT&T and then at Lehman covering telecom, so she had a lot of experience.

As of January 16, 2003, I would take on an advisory role as the firm’s global telecom strategist. My new job would be to recommend to CSFB’s clients a global portfolio of telecom stocks, telling investors how much of their portfolios should be invested in telecom versus other sectors, and
which parts of the world and specific companies looked most attractive for investment. It was a big picture view compared to the range I’d had before. It meant quarterly deadlines instead of daily crises and big-picture thinking instead of detailed company modeling.

I should have asked for this a long time ago, I thought to myself, as I started the transition process. I was burnt-out, exhausted, and depressed about the current state of affairs. I’d been both very right and very wrong in my career, but my industry was in a shambles, thanks to a potent mix of overcapacity, underwhelming demand, and good old-fashioned fraud.

I had done very little marketing that year, as the events of September 11 had sapped my will to globe-trot in a frenetic search for votes. For the first time, I didn’t really care whether I made number one on the
I.I.
list (I made number two in 2002, behind Morgan Stanley’s Simon Flannery, the analyst with the prescient negative call on Qwest). My new strategist role didn’t require me to be in the office that much. It was weird. I felt guilty, as if I were working half-time, even though I was putting in 40–45 hours per week. Effectively, I was working only 60 percent as much as I had for so many years. I even started taking a film class, seeking to catch up on some of the decades of culture I’d missed.

But just as I began to wind down, the case against Jack began to ramp up in a very serious way. Spitzer’s team had subpoenaed virtually all of Jack’s e-mails over the past several years in search of something damning. And in the fall of 2002, they found what they’d been looking for and a whole lot more, mostly relating to Jack’s upgrade of AT&T shares back in November 1999. What I had believed was a straightforward quid pro quo that traded positive research for banking in order to help win a piece of the AT&T Wireless IPO deal was actually much weirder, and a whole lot more sordid, than that.

It was a tale that had everything from scheming CEOs to kids to sex (or virtual sex, at least). All tied up in Jack’s upgrade, Spitzer would allege, was Citigroup CEO and Jack’s boss Sandy Weill’s desire to rid himself of his co-CEO, John Reed; AT&T boss Michael Armstrong’s desire to make Jack a bull on his stock; and—in the pièce de résistance—Jack’s desire to get his boy and girl twins into one of the most exclusive preschools in Manhattan, the 92nd Street Y. Even I played an unwitting cameo role in the saga, I would later learn.

In November of 2002,
The Wall Street Journal
and
The New York Times
ran a few blockbuster stories quoting from some e-mails that Jack had sent
to “a friend” in early 2001 and that had been leaked to the press, presumably by Spitzer’s investigators or some deep throat at Citigroup.
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That “friend” was actually a buy-side analyst named Carol Cutler, and I knew her fairly well, though not the same way Jack did, I soon found out.

Carol Cutler was a New York-based telecom analyst for the government of Singapore’s massive investment fund, a major client of both Jack’s and mine. A 40ish, artsy type with long red hair, she and I had had several run-ins, the most unpleasant of which occurred in early 2000, when Ehud and I lowered the forecast and target price for Williams Communications, a long distance startup. Well, Carol must have been loaded up with Williams shares. Just a few hours after our report was published, she called Ehud, who had written it, and left him a scathing voice mail telling him that our valuation methodology was horribly flawed.

“I know [this] methodology better than anyone,” Carol hissed. “You guys made huge mistakes in your report. Your target price should be going up, not down.” Ehud forwarded the message to me. I was astonished. Though I would never say “better than anyone,” Ehud and I did know how to do our jobs. I didn’t think our methods or assumptions were off base. They certainly weren’t deserving of such scathing remarks. It was pretty unusual for a client to be so angry about a fairly uncontroversial report like this one.

I didn’t figure out what her problem was—not until late 2002, that is, when I read Charles Gasparino’s
Journal
story detailing some of the findings of Spitzer’s investigation of Jack. It said, among many other things, that Carol and Jack had been having a steamy e-mail affair of sorts, with lots of digital fantasizing.
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Perhaps Jack’s disdain for me had rubbed off on his virtual paramour.

The
Journal
’s story also said that those e-mails contained a motive for Jack’s upgrade of AT&T. The truly crazy thing was that the e-mail conversation that ultimately cost Jack his reputation, $15 million in fines, and his job began with sexually-tinged insults about—bizarrely—me! As I later learned from reporter Gasparino, who was working on a book about Jack, Mary Meeker and Henry Blodget, Carol and Jack had a special nickname for me: DW, which alternately stood for either “dimwit” or “Dickless Wonder.” Some choice!

One day in early 2001, I guess to get on Jack’s good side, Carol wrote Jack the following e-mail: “DW has a big fantasy about you. He wants to give you a blowjob. Can you believe that! He’s heard your reputation for being a Svengali so now he has this fantasy that if he drinks from the well then
maybe he will finally understand telecom, what drives it and how it works….”
¹⁸

Yikes.

I guess what Carol was doing was playing to Jack’s ego by ridiculing me. I knew what I thought of Jack and was pretty sure I knew what he thought of me, but this was not just competitive fervor. It was obsession tinged with perversion. Unbeknownst to me, I was part of a virtual ménage à trois. I was repulsed.

And that wasn’t all. On January 13, 2001, Carol used me to push Jack’s buttons again.

“Do you think DW could do himself, much less anyone else?” wrote Jack.

“No,” Carol replied. He’s “…delusional and desperate to learn anything. That’s why he wants to be in the closet to watch the great one…maybe we should hook him up with fellow delusionist Armstrong,” she wrote. “Now that’s a perfect match made in hell.”

As disgusted as I was to have been referenced in this juvenile exchange, I was ultimately glad that it at least served some purpose. Apparently, Carol’s talk of me got Jack just riled up enough to expose some of his motivations for upgrading AT&T’s stock from Neutral to Buy back in late 1999, just before AT&T selected underwriters for the IPO of AT&T Wireless. “He’s already been done by Armstrong just doesn’t know it,” Jack responded, referring to me and my ill-timed upgrade of AT&T.

And then Jack laid out in living color his twisted justification for his AT&T upgrade 14 months earlier, apparently trying to dispel the notion that he had done it for something as pedestrian as $63 million in IPO underwriting fees. “You know, everybody thinks I upgraded [AT&T] to get the lead for [the AT&T wireless IPO in 2000],” he wrote. “Nope. I used Sandy to get my kids in 92nd St Y preschool (which is harder than Harvard) and Sandy needed Armstrong’s vote on our board to nuke Reed in showdown. Once coast clear for both of us (i.e., Sandy clear victor and kids confirmed) I went back to my normal negative self on T [AT&T’s ticker symbol]. Armstrong never knew that we both (Sandy and I) played him like a fiddle.”
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