frontline is made possible by the annual

financial support of PBS viewers like

you thank you buried in the debris of

sep tember 11th are the case files of a

wide-ranging investigation by the

Securities and Exchange Commission

involving some of the biggest banks on

Wall Street

now those cases are being reassembled

and pursued tonight on Frontline the

story of a scandal an investigation

delayed but not destroyed

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you

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there's hope on Wall Street that the

worst is over that last year's market

collapse and the sep tember 11th attacks

are history

that in the new year investors will

forget the past regain their faith and

come back strong

but a shadow still hangs over Wall

Street for the last year and a half both

government regulators and private

attorneys have been investigating

whether the Go Go markets of recent

years were steeped not just in excessive

speculation but fraud whether investment

bankers and brokerage houses concealed

conflicts of interest and deliberately

manipulated stock prices

did the biggest names on Wall Street

violate the public trust CS first Boston

Vulcan sax Morgan Stanley Merrill Lynch

I mean these are the biggest players and

that's what makes this so shocking that

it could infect even institutions of

that size these are revered institutions

in Wall Street a bubble environment

brings out the basest qualities of all

the players the kinds of guidelines that

monitor corporate behavior and tend to

be more flexible at a time of excess and

it feeds upon itself this was generally

a good day for answers just a couple of

years ago Americans sat mesmerised as

the investment bank stock analysts went

on television and touted stock after

stock after stop AOL yahoo amazon has

really created a very strong brand

awareness with it was Wall Street's

version of a telephone calm shut up

today on track looks like to hit a

billion shares today's Internet stocks

drove a powerful surge in Wall Street

today the day at the heart of it was the

mad scramble by bankers and venture

capitalists to take hundreds of

unprofitable young internet companies

public but I think the long term

opportunity really is to be the customer

interface to your door say the internet

is so revolutionary that the usual rules

for valuing a stock such as revenues and

earnings no longer apply over and over

again seems like this one would play out

at the dot-coms on the day their

company's stock went public employees

would watch the value of their stock

options sore

making paper millionaires out of many of

them between 1990 and mid two thousand

more than 4,700 new companies debuted on

America's stock exchanges the conclusion

that we came to rightly or wrongly saw

was that the internet was going to

fundamentally change the way business

was run across the board in every sector

of a business everybody thought they

could get rich quick everybody across

from retail investor to investment bank

we had this period where money was

growing on trees which is totally cool

while it's going on 30 for the daily

volume 3.7 million shares we are almost

a two billion dollar company this

company alone opened at fourteen dollars

a share and closed at 37 a first day

gain of one hundred sixty four percent

as investors clamored for more bankers

who make a hefty 7% fee on all the new

public offerings they underwrite eagerly

trolled for new internet companies the

day that we move into our offices we

started getting calls from investment

bankers inquiring as to what our

thoughts were on raising additional

capital going public this is before we

hit furniture little meat boxes for our

desks and we were sitting on the floor

Michael Merrick was CEO of Mother Nature

calm there was that level of buzz in the

overall public markets at the time and

you laugh about it you're sitting there

with your box going should I buy

furniture should I talk to investment

banker about going public going public

that time in my mind is probably almost

exactly the same as if I was raining it

raising a first or a second round of

venture capital there's a lot of

unproven elements Brian Nesmith was head

of an Internet technology company called

cash flow I haven't proven that we can

be profitable I haven't proven that can

really grow the revenue I don't have all

the members of the management team the

product may even still have some

technology issues that we have to

validate and effectively the way I start

to think of as we had millions of

investors that started acting like

venture capitalists and they're not

necessarily very smart ones they don't

do the due diligence they don't do the

fundamental work there were so many

deals that went through during you know

99 and 2000 and the heart

part for both sides for bankers and

analysts the hardest part was that a lot

of companies that looked like there was

no there there we're getting out into

the marketplace and going to the moon it

could be as simple as adding a dot-com

to your name while making a few internet

sized promises as we like to say one day

we will touch every mortgage in America

when Seth Warner changed the name of his

first mortgage network to mortgage com

and went on the net the estimated market

value jumped from 100 to 800 million

dollars we went around to all of the

underwriters the largest underwriters in

the country most prestigious by

anybody's count every one of them was

suggesting that this was a wonderful

time to take a company like ours public

helping take companies public is one of

the most profitable businesses

investment banks have and naturally we

wanted to talk to the investment bankers

about the process we called and we wrote

letters but Goldman Sachs Credit Suisse

first Boston Bear Stearns Merrill Lynch

and Morgan Stanley all said that they

didn't want to talk

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we are not born with these institutions

have been asking us to trust them for a

long time trust must be earned trust

must be proven but what has been

obscured behind the veil of advertising

rhetoric and images is how the nature of

their business has changed that is why

we measure success one investor at a

time when did things change I can tell

you the exact day it changed the world

changed on may one 1975 Mayday because

that was the day commissions would

deregulated joe nocera is an editor and

writer at fortune magazine as

commissions went down suddenly we had to

find some other way to make money for

the house these institutions once

primarily thought of his brokerage

houses used to make their big profits by

offering advice to clients on what

stocks to buy or sell and then charging

Commission's on those transactions but

when deregulation forced commission

rates to drop they began to rely more on

the money they made from investment

banking in the 80s it was mergers and

acquisitions then in 1995 along came the

Netscape initial public offering or IPO

the company was less than 18 months old

had little revenue and no profits its

debut would change everything 1995

Netscape goes public it's the first big

it nobody expects what happens in that

scape it's the first big pop stock

it was just whoa you know what was that

all about and suddenly if you're an

investment bank you realize that this is

something that can be taken advantage of

it was very hard to justify the price of

it on any rational economic benchmarks

that you usually use bill hambrick twas

the one investment banker who did talk

to frontline he's an industry veteran

who specializes in technology companies

and was one of the bankers who took

Netscape public there was this

perception that oh boy I've got to get

into these early stage internet

companies because the first wave of

early-stage internet companies starting

with netscape did very well for

customers after Netscape hundreds of new

startups suddenly sprouted up in

California's Silicon Valley companies

like Yahoo ebay and excite new companies

are usually never profitable but they

usually aren't offered to the public

until they are most companies in Silicon

Valley used to take you know six or

seven years of losses to finally go to

get to profitability and then a little

bit longer to go public so there was you

know there was a more measured quality

of moving these companies into the

public space kara swisher writes a

column for The Wall Street Journal and

served as a consultant to frontline on

this project presumably the people that

are in the public markets the they're

buying fully baked companies and these

weren't even these weren't in the oven

for 10 minutes these kind of things they

were not even close to being baked and

they were offering them up as cooked in

Silicon Valley the investment banks have

long relied on a group of venture

capitalists or BCS to find and nurture

the companies the bank's would then

bring public after Netscape a new class

of more aggressive venture firms

appeared Jay Hogue founded technology

crossover ventures in 1995 I think what

Netscape triggered was a sense that you

didn't have to be profitable to go

public

that if you were growing fast enough at

some point in the future you would you

know you would grow into profitability

and you know it unleashed a lot of

different things including huge numbers

of IPOs really big upcycled and venture

funding and to some extent some some bad

ideas during the tech bubble hugs firm

TCV put up impressive returns posting

over one hundred percent gains in their

portfolios for several years running one

of the best investing records in Silicon

Valley in mid-2000 TCB was able to

attract 1.6 billion investor dollars to

form the largest technology venture

capital fund in US history but unlike

traditional venture firms that invest

early in companies and bring them up

slowly TCV invested in many companies

just months before their IPOs we asked

Jay hogue and his partner Rick Campbell

if they now think it was appropriate to

rush such young companies to market all

these businesses that are losing money

have to be financed you have to go get

money somewhere at that point in time

what the market was saying was you

should go get basically almost free

capital and the process get public so as

a as a board member the decision would

be very tough to not push a company for

an IPO the problem was that many of the

people who bought TCV backed companies

in the public markets or as the insiders

call it the aftermarket lost big there

was a banker taking a company public a

pretty prominent banker and he sent me

the prospectus for the company and the

company had no revenues there was no

money coming in like they had no

customers and they were taking it public

and he said what do you think and i said

i'm looking at my window and there is a

grandmother on the street with a with a

purse and i bet if I go mugged or we

could go do it together right now

because that's what you're doing you're

mugging the public do you believe there

was an inappropriate transference of

risk to the public you know I and we

can't words like inappropriate I'm you

know I don't feel in a position to make

a value judgment about what is quote

appropriate versus what

is is inappropriate reg was it airport

new companies kept going public whether

it was appropriate or not an IPO would

really put us on the map the process

began with calling the bankers there are

trade-offs are we gonna make it don't

worry really get you there what you do

is you invite the bankers who have

expressed interest in to talk to you at

a board meeting and they they pitch

their services is called a bake-off and

so in i believe it was june we had a

board meeting where we had a number of

investment bankers who came in and

pitched our board you're looking at past

reputation what position do they have in

the investment community what how much

they willing to stand behind what

they're doing in this environment and a

lot of it too is it's a name for you if

it's a good solid company with solid

backers you know the CSF be in morgan

stanley and goldman sachs they'll all

want to take the public the top

companies in the running for our

consideration or Lehman Brothers Merrill

Lynch Morgan Stanley Goldman Sachs and

CS first Boston once a bank is selected

the bankers take the company on a

two-week whirlwind tour visiting the big

mutual funds and other big money

investors making their pitches lining up

buyers for the IPO it's called a road

show the road show is just a repetitious

repeat of the message that you're trying

to help vestas understand about the

product the bankers then take you out

and it's done is a very condensed event

it's a anywhere from a 22 a three-week

process we started in New York then you

know Boston Philadelphia Washington

Chicago Minneapolis Houston Dallas San

Francisco Los Angeles and the poor

company for two weeks is in meetings

from six in the morning until seven at

night back to back you know doing

meetings with all these various

institutional investors pitching their

story David siminoff is a money manager

for the capital group which oversees the

American Funds one of the largest mutual

fund families in the world so what

happens sales trader will call and say

you know I have an IPO that you ought to

look at and
around you know April 7th and they're

going to be in San Francisco can you sit

down and meet with them for an hour and

hear their story you could put me in

front of a human being or a mannequin or

gorilla I was going to go through the

same pitch of course I have to be

responsive to their questions but I'm

just there to sell you know pull the

string and I'm selling in the end what

what cash flow wanted to get out of the

IPR was a half dozen institutional

investors that believe believe in what

you're doing leaving the company believe

in the management team and are not only

going to be purchasing the IPO but any

long-term accumulators of the stock in

tonight's moneyline movers cash flow up

one on one hundred and two and three

eighths and its stock market debut the

networking equipment maker enjoy one of

the best opening days ever the stock

trading at five times its offering price

cash flow was a huge hit and there's

remains one of the top 10 biggest first

day pops of all time I can I is Hawaiian

for cool but investor hot IPOs became a

staple of the technology telephone

technology companies sword more than

four hundred and fifty percent see a

stock that stole the show today it is

called free market this pops gave the

company's publicity but not much more in

public today selling shares to the

public and take a look at what their

stock did up four hundred and eighty-two

percent or so if the investment banks

had been doing their job the way they

were supposed to be doing if they really

had the best interest of the companies

at heart you would have never seen the

situation where stocks or IPOs go up two

three four hundred percent on the first

day I mean that is a crime priceline.com

is the latest beneficiary of the

internet stock craze shares of the

internet commerce company debuted

sixteen dollars they closed at $69

arrives of over three hundred and thirty

percent the famous case is the globe

calm which I believe went up over five

hundred percent on the first day and it

was at home I God look at that look at

that earth web was up three hundred and

seventy-nine percent in the globe calm

which only traded one day gained six

hundred and six percent on the week what

is the reason you have an IPO it's to

put money in the coffers of the company

that's the reason you do it when you

have a situation where it's going up

three hundred percent on the first day

that's three hundred percent

that the company is not getting the

amazon.com of drugstores went public

today in the latest smashing net debut

drugstore.com nearly tripled in price

individual investors did not benefit

much from these big pops either that's

because almost all of the IPO shares had

already been allocated to big mutual and

hedge fund investors during the roadshow

shazza the online pharmacy exploded on

that debut trading day then when the

stock skyrocketed the institutional

managers sold immediately it was cold

flipping in a four-year period I saw

over 500 IPOs we probably owned 200 or

250 of them for 10 minutes and many of

them for 10 minutes you know where they

would at eight or ten dollars a share

you thought okay i can understand how

this can compound twenty percent a year

if they hit their targets but when the

first print of the IPO was $95 is very

easy to sell you get them for fifteen

dollars and then go up to 126 and you

sell them and of course everybody wanted

them because it was a sure thing there

was no way you could lose money because

every time one of these companies went

public they shot up by we have five six

seven hundred percent so there really

was no way to lose money the great

majority of the people that we saw in

the roadshow bought the stock at the IPO

inflicted that same day are flipped it

within a couple weeks Silicon Valley's

undisputed king of IPOs was banker Frank

Petrone his star rose while at Morgan

Stanley where in 1995 he made IPO

history when he took Netscape public he

was one of the first wall street bankers

to set up an office in Silicon Valley

and he made a big impression he was

heard this larger-than-life figure in

the valley who had some huge successes

and was considered sort of outrageous

and opinionated and aggressive and sort

of swashbuckling he is that

swashbuckling reputation I think he

really identified much more with the

Silicon Valley entrepreneur than his

investment banking cohorts back in New

York quattrone declined to speak with

frontline but Wall Street Journal

reporter Susan pulliam and Randall Smith

have fall
patrones career from the early days at

Morgan Stanley to credit suisse first

boston the thing that distinguished

first Boston here is that they they did

have the foresight to hire the best

technology banker in the business just

before this enormous boom in technology

stock issues and it literally took the

firm from being an also-ran in stock

underwriting to the very top in the

rankings but the thing that people come

back to most often when they talk about

Frank quattrone is control that he's a

control freak and wants to be involved

in every step of the process the people

of Morgan and Goldman had more of a

conservative air and Frank had more of

like a like a venture capitalist himself

he has kind of a big personality I mean

you don't it's not about csfb it's about

Frank withdrawn by 1998 Cutrone had

taken more companies public than any

other investment banker in the valley he

relied on a select group of venture

capitalists to feed him young companies

and he treated them to a piece of the

action in order to encourage them to

keep the deals coming in the valley they

were called Friends of Frank being a

friend of Frank involved being either

venture capital executive or an

executive of a company that was about to

go public or was public or just just to

technology executives but one of the

perks of being a friend of Frank was

you've got to invest in in some of his

deals or you know in some cases all of

his deals what does that mean you got to

invest in deals anybody can invest in

his deals or not well no I mean I think

in order to get a you and I if we went

to our broker and try to get an IPO

allocation would would be told gia you

know we maybe you're probably not but

the the but I 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 price can you give an

example of that of well I you know VA

Linux clearly is is a case where some

one of Frank's best clients jai ho dove

TCV technology crossover ventures got

50,000 shares which is a pretty large

allocation Jay hugs venture firm

technology crossover ventures received

its share allocation on December 9th

1999 although TCV had not funded via

Linux hug was the kind of regular

supplier of hot companies Cutrone wanted

to favor VA Linux's IPO was a rocket VA

Linux lnu ax is up again this morning in

premarket the allocation gave TC v's

franchise hedge fund the right to buy

50,000 shares of va Linux at the

offering price public yesterday at

thirty dollars a share and now it's at

262 according to instinet linux as it

turned out VA Linux posted the biggest

first day gain in Wall Street history

TCV invested 1.5 million dollars at the

end of the first day of trading the

value of TC B's allocation was just

short of 12 million suddenly you get

this huge surge where the stock leaps

seven times creates a billion dollars or

a billion to of market value that's

profit to the person who got the IPO

allocation and if you trace it out I

think you'll find anything that goes

that high almost all of it is flipped

because it just doesn't make sense

almost not to so so effectively the

underwriter parceled out a billion 200

million of guaranteed profit to his

clients that's that's quite an you know

is you can imagine that's a very nice

thing to happen it's like legalized

bribery its favor building it's like

taking someone out to lunch and paying

for their meal and that's okay but if

you gave me a yacht that would probably

not be okay Hogue has refused to talk

specifically about the VA Linux deal but

he defends the IPO allocation process

the specific allocation of how IPOs

happens is the investment banks business

why we you know have been allocated

shares again we have an ongoing we know

we're generating Trading Commission's it

because of the because of the franchise

fund with a whole variety of us

so some cases we don't get IPO

allocations because they say now you

know based upon the criterion we're

making for allocations you're not big

enough to warrant it in other cases

where we're an important perhaps you

know the general Trading Commission's or

other things we do people tend to focus

on the period where it seemed right like

every IPO was going up one hundred or

two hundred percent we can tell you many

times including the very first IPO that

TCV was involved with with a little

company called Savile systems where we

played placed our order for for the IPO

and got our IPO shares and watch the

stock drop drop twenty percent in you

know about an hour and a half but at ecv

that rarely happened according to

Fortune magazine d cv lost money on only

two of 76 companies it invested in

between 1995 and 99 in some cases

privileged investors like TCV were given

the option to buy into an IPO allocation

even after the stock had started trading

up in one case in particular i can

remember getting a call toward the end

of the first day of trading for a

company they had priced the IPO at $13

it was trading you could look at their

quote on screen say it was trading at

forty dollars and you get a call from

the investment banker saying would you

like 5,000 shares of this company hello

it's at what price well at $13 you can

you can buy because they still haven't

there's still this allocation this stock

this IPO stock that isn't fully

allocated yet so you can buy 213 when

it's selling right there in your quote

run at 42 so the investment banker has

offered you free money you get a call

absolutely and you can sell it and flip

it right then and there I think

underwriters economic agendas started to

determine who would get the stock

instead of a situation where you're

hired as an underwriter to place the

stock with people who are going to be

the long-term shareholder

when you get into volatile hot markets

where you get this unusual first day

trading profit there's a tremendous

propensity to give that stock to your

best clients and they in turn sell it

and take a quick profit and then the the

long-term buyer the guy who you want in

the first place ends up buying it at the

volatile after market price and it

happens only when you get into these

really hot markets but it also creates

an atmosphere where an underwriter sales

force is in effect giving away

guaranteed profit and if you're giving

away guaranteed profit you probably at

some point in the food chain are going

to have some deal made that return

something to the underwriter by mid-1999

it was common knowledge among insiders

on Wall Street that some banks had begun

taking what could be called kickbacks

from some mutual and hedge fund

investors in return for hot IPO stock

allocations but in the midst of the

frenzy there was no one yet willing to

blow a whistle too many people were

getting rich we asked former SEC

chairman Arthur Levitt to comment on a

hypothetical case if a large mutual fund

is receiving an allocation in an IPO on

the understanding that they will make

certain purchases or pay higher

commissions in the aftermarket is that a

serious violation I think if the

hypothetically if that investor that

recipient of an IPO was required to pay

extraordinary commissions on an

unrelated transaction or required to

make specific aftermarket purchases I

believe that hypothetically you could

consider that a manipulative action that

manipulates the price of a stock it

could it could manipulate the price of a

stock the intention is to minute but

late the price of the stock it could I

would assume that that's the intention

is to manipulate the price of the stock

upwards and finally dumped it to the

public and all the insiders get out

I wouldn't comment on that but I

wouldn't be too far off base to to guess

that that's would be the result that's a

possibility on a hypothetical instance

only one network truly covers the

financial markets around the globe once

an IPO is issued the stock starts

trading on the so-called aftermarket to

ordinary public investors it's their

first chance to buy ends every day with

analysts and reporters stationed around

the globe this is where the bank stock

analysts and the media play a vital role

a world leader in business deals is CNBC

bondage revenge if you are the

investment banker for a company I think

it's 30 days or 25 days after the

company goes public your obligation is

to put out a research reports and here's

what this company does here's how I

valued it here's what I think of it for

view and a forecast of net stock

developments are joined by analysts

would often appear on TV and Liz buyer

admits they were under pressure to issue

positive news to keep their clients

happy there is no here she is touting

beyond.com a company that her bank csfb

had taken public little beyond.com a

much smaller company is working very

hard on downloading products to

consumers that will be a big deal small

today but watch it going forward if your

firm has done banking work for a client

it's understood that the analyst is not

going to come out and say bad ideas stay

away from this over the last several

years and quarters they've trended

upward so if you can stand the

volatility the good stocks down the more

swayin analyst had the bigger the

pressure some of the bigger stars were

cheerleaders not analysts and it didn't

it was no longer about who was doing the

best analysis because the best analysis

got you know where it was who was being

the best cheerleader for those companies

and that's problematic that's

troublesome and in today stock picks

segment two internet analyst Scott

Aaron's from barrister positive

recommendations could have a dramatic

effect when Bear Stearns took software

company digital river public the banks

internet analyst Scott Eyre

issued a buy and the stock rose five

hundred percent over the next three

months later he reiterated his by on CNN

and I like digitalrev robux I think it's

an undiscovered e-commerce name it's

many who lost money in the markets now

believe that analysts like Erin's should

have revealed that his bank Bear Stearns

had taken digital river public and had

an interest in keeping the stock pumped

up relatively undiscovered and as a

great management team and I expect it to

be a big success analyst rarely ever

issued sells errands Bank Bear Stearns

has issued cells in less than one

percent of its recommendations why do

you never use a sell recommendation I

wouldn't say I mean I don't think it's

sure to say that people never used to

sell recommendation why do they rarely

ever use a sell recommendation because I

guess they rarely thought that you

should be selling the stock they thought

that maybe it was a longer term hold

they did have to do with a feeling that

a sell recommendation would possibly do

too much damage to the company was that

a factor can you be more specific you

couldn't issue a cell I mean Bear

Stearns just wouldn't allow you sure

they would people issued cells go I mean

if you have you looked at you said

neutral was the lowest that you gave so

that I gave that was low that I gave so

why wouldn't you issue a cell I didn't

put too much thought into it the problem

for the public is that they don't

understand how analysts get paid and so

they actually think that the analyst is

sort of on their side kind of working

for them or at least that's what they

used to think when things were good and

stocks were going up but in fact you

know analysts get paid on the basis of

how many deals they can bring to their

firm and how tightly integrated they are

with the underwriting process which has

nothing to do with helping small

investors and everything to do with with

bringing IPOs public which makes a huge

amount for the firm and which makes a

huge amount for the sort of investing

professional insiders who get these

deals in many respects a culture of

gamesmanship has taken root in the

financial community making it difficult

to tell salesmanship

from honest advice chairman of the

Securities and Exchange Commission

Arthur Levitt made stock analysts and

television a major focus of his public

statements a lot of analysts that we see

on television recommending stocks work

for firms that have business

relationships with the same companies

that the analyst cover and some of these

analysts paychecks are typically tied to

the performance of their employers one

can only imagine how unpopular an

analyst would be who downgrades his

firm's best client at one point Leavitt

sent an SEC staffer to talk to the

producers of the major money shows about

the issue of analyst recommendations the

networks in general felt that they had

no responsibility in terms of monitoring

the guests that appeared on their

programs and my feeling was that the

analysts who came on those shows and

promoted certain stocks that him that

represented companies involving

investment banking clients for their

employers had a responsibility to

clearly reveal that on camera I still

feel that way I still feel that the kind

of disclosure we're getting from

analysts and both print and electronic

media is incomplete and inadequate

in spite of hand-wringing and concern

from regulators this is Manila the

markets continued on their way to record

Heights first war on our top story

Nasdaq 5,000 America's favorite stock

index closed above 5k for the first time

today after euphoria where it started

and who started it exactly what is a

debatable point but once the circle

started spinning everybody fed it you

know the public market investors did the

venture capitalists did the bankers did

the companies are involved in it did

everybody got caught up into the the

feeding frenzy I was a part of it I'm

sure if you were a purchaser of stock

and that Marmot you were caught up into

it was making money Brian Naismith CEO

of cash flow shares of the network

equipment maker sawed up nearly fourteen

dollars after Credit Suisse first Boston

raised his price target and repeated a

my rating on the stock that put his

one-day gain on paper at more than 29

million dollars kind of valuations that

were going on and the kind of trading

that was happening in public markets it

really is it's really fueled by what you

would call the greater fool theory in

other words it has to be a greater fool

than you that buys it or the whole thing

collapses well ultimately you run out of

greater fools after what they are

already calling black friday they are

counting up the damage on Wall Street in

the spring of 2000 the stampede reversed

sent the Dow and the nasdaq plummeting

it was the worst single-day point loss

ever for both exchanges some person or

some groups of people and I think it was

mainly the large institutional investors

stood up and said no I'm not putting

another hundred million dollars in this

company because you've not made any

progress to getting profitable and once

that happened that spilled back into

those companies who stop purchasing

equipment from suppliers like us are

from other companies who then our

revenue started to go down and it all

happened very quickly at mother nature

calm were constantly checking out

products like ginkgo biloba a natural

herb from China used to enhance memory

what Mother Nature fell along with

everyone else chic their stock had

dropped to under two dollars by April of

2000 we started to believe management

started to believe that

we were not going to easily recover and

we should operate the business

differently we should stop spending so

much money when you were on TV at that

time we were burning money about 8

million a month here's our checking out

maka a Peruvian earth that's said to

enhance male virility or anywhere here

we were wonderful cash burning machine

so the first thing we did it we just

decided to cut our marketing spending

and so just stop the cash burn the

dot-com failures continue to mount

especially throughout the remainder of

the year by fits and starts the market

continued to decline the company

announced today it's laying off 518

people are 80 new business orders dried

up technology stocks got trounced on the

day of unser as soon as one person

called stop you know it's there was so

much momentum built up it just just came

apart who's losing money Brian Naismith

he's the CEO of cash flow shares of the

internet appliance provider got hammered

today losing over 10 points after Bear

Stearns issued some cautious comments on

the stock citing slowing shipments his

one-day loss on paper was nearly 23

million bucks at mother nature they were

quickly learning that all their

assumptions about the internet were

wrong in the direct marketing business

which is what a B to C Company is the

only metric that works here is what's

called lifetime customer value for the

average customer you get what do they

spend the first time what percent come

back and buy what do they spend the

second time what is it cost to service

each of those transactions and to do

this analysis you need a lot of data the

team spent days crunching numbers we

concluded that our lifetime customer

value given the data so far was only

about ten dollars in other words we

could not be a profitable company unless

we could acquire a customer for less

than ten dollars and at the time it was

costing us sixty to eighty dollars to

get a customer that was a very sobering

conclusion and the whole theory of

e-commerce the whole theory was that

online customers would be valuable you'd

get these customers and they would be

worth a lot so you could afford to spend

it afford to spend a lot of money to get

them and what we realized I think we

were on the first to realize it was that

gee they're not that valuable

less than a year after opening mother

nature closed its doors in November of

2000 in the aftermath of the collapse

everyone is second-guessing at one point

in 1999 mortgage com had been offered a

buyout from internet financial company

into it and offer credit suisse advised

CEO Seth Warner to turn down Warner says

he is now sorry he listened to his

bankers the fact is that they make more

money doing an IPO and you're becoming a

company in there and they're stable of

companies that they've taken public then

if they just do a one-time fairness

opinion and then you're now a subsidiary

of another public company just before

the IPO Werner wrote a two page email to

his board of directors mortgage calms

management is unanimous in wanting to

pursue the Intuit deal the VCS he noted

are undoubtedly anxious to maximize the

returns on their investment by going

public one point time TCV and I don't

remember who it was whether it was Jay

or Tom said to me we have done this on

numerous occasions we have made a lot of

money for ourselves and our shareholders

we know what we're doing Larry the

public as opposed to taking this price

we should do the IPO and that's

basically the message i got from all

three of my venture capital companies i

should have been more forceful in the

process of getting them to accept that

five those five million shares and move

on in hindsight we should have sold the

company rather than go public it's just

a story of greed absolutely yeah but

that that is the definition of venture

capital you better elaborate on that

it's isn't it well I mean it the deaf

mean that's we our goal is to get the

biggest return possible from every

company we invest in this is what is

left of mortgage com today over 3,000

boxes of papers stored in a warehouse

just north of Miami one of the attorneys

suing on behalf of creditors and

investors says mortgage com wasn't just

about greed he says the VCS in the bank

credit suisse first boston pursued an

IPO while intentionally misrepresenting

the company's history and its financial

situation the fact is that their conduct

as fiduciaries must be judged based on

what choices they made and what they did

after there was no into a deal and what

they did was instead of scaling this

thing properly trying to run it as a

business they concealed information

manipulated financial information and

against the advice of their internal

financial people pawn this off on to the

public what's the justification for that

the devil made me do it

two months after mortgage coms IPO jaiho

gov technology crossover ventures was a

guest on Lewis route kaisers Wall Street

week on PBS Hogue stated that mortgage

com was among T cv's favorites in the

business of consumer area were very high

on both auto web and mortgage com these

are literally companies serving

trillion-dollar markets enormous

opportunity according to Sam burstyn fog

should have known better and burstyn has

filed suit against TCV as well as CS

first Boston he says the insiders were

simply looking for a way to keep the

stock value up until they could get

their money out Hogan CS first Boston do

not want to discuss mortgage com today

one of the lessons that the public has

to learn is that the fact that an

investment banker is underwriting a

public offering does not mean that it's

a sound investment and indeed often

means that it's not a sound investment

but that the IPO is merely an exit

strategy for the insiders underwriters

traditionally look very carefully at

building a business that would last you

would get it up to a sustainable level

and it would be built that philosophy

was gone in the tech revolution in the

1980s attorney Tom to successfully sued

Michael Milken and his firm drexel

burnham lambert for using spurious junk

bonds to raise capital for Wall Street

now he is among those attorneys suing

Credit Suisse first Boston for how it

handled the mortgage com IPO he sees

distinct similarities between the IPO

market of the 90s the junk bond market

of the 80s what you saw in that

phenomenon is early on they were

probably a lot of good companies then

there was a rush to replicate that

Drexel needed more and more product

because once you set up that engine the

salesman the people out on the street

they're all starting to rely on that

distribution and which is all generated

by fee

at some point you get to a point where

the good deals are not separated from

the bad deals I think you might find in

this dot comedy that we went through

once the mechanism for those IPOs were

set up it was like you know stamping

them out to keep everybody eating and

making a lot of money and that's not to

say a lot of them weren't good deals a

lot of the the junk bond deals turned

out to be good deals but as the thing

progressed and more momentum is there

there was a lot of money chasing bad

deals and there weren't that many good

deals in june of 2001 under pressure

from private and government

investigations CS first Boston fired

three of its bankers and its CEO all

denied wrongdoing then in december 2001

the Justice Department dropped its

criminal investigation of cs first

boston but the bank has agreed without

admitting they did anything wrong to pay

a hundred million dollar fine to the SEC

the fifth largest in Sec history

meanwhile the SEC continues to

investigate other banks the public needs

to realize really two things one that

these people are not promoting the

public's interest in any of these

transactions but to if they rely on them

and the information is false or was

recklessly provided they have recourse

they sue the bastards Mel Weis is a

Manhattan attorney who has filed 110

lawsuits against scores of companies and

seven leading investment banks we're

dealing with a market manipulation by

the investment banking community and

that's the scary thing that the

investment banking community that has a

fiduciary responsibility and a statutory

responsibility to protect the customer

is actually in creating the

artificiality in the market the only way

you can ever take the possible excesses

out of the system is to have an on

preferential

way of allocating the stock it's got to

be fair it's got to be open and and and

in that way you get rid of the kind of

things that sneak into a system where

you have preferential allocation that's

why we came up with the auction Hambrick

calls it a Dutch auction put the IPO on

the internet and let any and all buyers

post their bids we go out to the world

and say here is company X how many

shares do you want and what are you

willing to pay if we want to sell a

million shares we started the highest

price bid and countdown to the millionth

share and that millions share becomes

the clearing price for the transaction

and it where is everybody who bid the

clearing price or higher gets the stock

they bid for at the clearing price but

at the height of the bubble Pembroke's

idea got a cool reception is there an

opportunity for a new way of doing IPOs

you know intellectually sure it doesn't

appear that the Dutch auction has gotten

a huge amount of traction yet Dutch

auctions make a great deal of sense

theoretically right everybody pays what

they're willing to pay and that's how

you parse out the stocks but it didn't

play well in an environment where people

wanted that marketing news right you

don't get I you there is no headline

that says you know XYZ corp trades up

ninety percent on its first day if

there's a Dutch auction when we were

looking to go public we considered that

we thought it was conceptually a

beautiful solution but we were led to

believe that the institutions would not

support our stock so if we did that if

we went the Hamburg method we would not

get an institutional support there

wasn't anybody truly that really wanted

to listen to us I kind of felt like the

designated driver at a New Year's Eve

party you should come in and say hey

guys no this is this isn't going to turn

out well and and and and their reaction

was what could be better than this i

sell my stock at 10 and it goes to 100

and everybody's rich and who's lost and

is this a wonderful thing

all right all right good morning good

afternoon and good evening depending

where you are for now most companies are

reluctant to break ranks with Wall

Street Dutch auction was incorporated

into the instead offering as you all

know seventeen and a half percent of the

shares as a kind of experiment in

underwriting instinet the electronic

brokerage company decided to split its

IPO between hambrick and a traditional

underwriter Credit Suisse first Boston

continued innovation into the

marketplace which is something that this

company stands for and I know Bill

hambrick has really led the charge and

that vision and we'd like to thank there

like a instinet opened at 14 a share and

closed at seventeen point 65 both very

well together this is the first time

that retail investors who bid 14 50 or

higher are guaranteed an allocation in

shares right and I think that in the

post bubble environment this IPO was

considered a success and proof that the

Dutch auction process could work

excellent this Friday yeah exactly just

landed but without the IPO allocation

favor Bank the process strikes fear in

the hearts of traditional bankers the

ultimate leverage is being able to

include somebody or exclude them from an

offering that he thinks is attractive

that's the leverage that people fight to

keep that's the at the very base of a

lot of these firms is that is that

leverage of allocation you've done 400

already yeah great the whole implication

of the internet is bringing transparency

and level playing field to marketplaces

this is this is what it's all about and

I think the big firms understand that I

mean they and and ultimately know that

no matter how they want to fight to keep

a cozy kind of relationship and to keep

keep transparency out of the marketplace

it just isn't going to happen somebody

is going to bring transparency to this

more

boys

but hambrick may be overly optimistic

about Wall Street's willingness to

change the IPO explosion of recent years

generated of feeding frenzy worth

billions to Wall Street's banks very few

people who work here believe the system

needs fixing you know democratization

has been going on in this country

financially since the 70s and people do

have a lot more information than they

used to and they can make better

decisions and they can trade stocks more

easily and all that is true but if this

thing if this if this is the event of

Internet mania prove anything they

proved that Wall Street is still a club

and that insiders still have an enormous

advantage over the rest of us and all

the technology and all the

democratization has simply not been able

to trump that one fact

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