Many a Wall Street analyst rose from obscure number cruncher to celebrated market maven during the 1990s stock market bubble. But few experienced the ascent, with its exposure to power and riches but also to glaring conflicts of interest, as intensely as did Dan Reingold. In his forthcoming book, Confessions of a Wall Street Analyst, the 52-year-old Reingold, who is now with the Columbia Institute for Tele-Information at Columbia University’s Graduate School of Business, provides a candid insider’s account of what it was like to be a top-ranked telecommunications analyst inside a giant speculative bubble. Written with his niece, Jennifer Reingold, a Senior Writer at Fast Company magazine, his account will be published next month by HarperCollins. What follows are excerpts.
IN THE FALL OF 1999, Institutional Investor published its annual ranking of the All-America Research Team, along with a cover story looking at trends in the research business and the changing role of the research analyst. For the third year in a row, I (then at Merrill Lynch & Co.) was the second-ranked [wireline] telecommunications analyst, behind Jack Grubman. I wasn’t surprised at all: He was not only the best-known analyst in telecom but also the best-known analyst on all of Wall Street. Some hated him, some loved him, but everyone listened to what he had to say.
And if you really listened to what he said, it was pretty amazing. II interviewed Jack, and he was proud to speak out, a man at the top of his game. He made no apologies for his aggressive actions in favor of the companies he liked, as well as his role in helping Salomon Smith Barney’s bankers land some of the biggest deals on the planet.
“Though some money managers grouse that they can never get him on the phone because he’s so busy helping out on deals, many more rave about the connections he’s made with top telecom company executives from all that deal making,” the magazine wrote.
Jack’s response was bold, even for him. “‘The role of the sell-side has changed so dramatically. You try to do your best to stay objective, but it’s becoming an increasingly difficult challenge,’ says Grubman, stressing that disclosure of potential conflicts to clients is essential. ‘They know when I have an ax to grind -- I tell them. There are known conflicts and potential land mines. But anyone who steps on one, it’s really shame on them.’”
Earlier that year, Jack even announced proudly to a rival banker that “when it comes to [WorldCom CEO] Bernie [Ebbers] and me, there’s no Chinese wall.” Jack was simply rubbing all of our noses in the fact that he was on the inside of these negotiations and the rest of us weren’t.
This was typical Jack: brash, arrogant, reckless and -- literally -- daring. He was daring the authorities to catch him. Jack seemed to feel he could tell the world that he knew what he was doing was dangerous and possibly wrong, but somehow he felt he was so clever that he could fly above the fray. Shame on them?
THE $14 BILLION LEAK
On September 8, 1999, about 200 Wall Street investors and analysts who covered the telecom sector arrived at the Kansas City Hyatt for an all-day meeting with the management of Sprint, the $80 billion telecommunications giant. The meeting had kicked off the evening before in the hotel’s ballroom with a dinner and a keynote speech by Sprint’s longtime CEO, Bill Esrey.
I managed to get a seat next to Bill. Also seated at the table were eight other analysts. We had about 30 minutes before Bill Esrey was scheduled to speak to the entire room, so we jumped right into it, each of us eager to sneak in a few questions. As often was the case with Bill, who seemed to hate analyst meetings, he was just vague enough to give us nothing to go on.
Finally, I threw out the question none of us expected a serious response to: Might Sprint consider merging with another long-distance company, like AT&T or MCI WorldCom? It was a very unlikely scenario, since it would certainly set off alarm bells in the world of antitrust, and since Bill himself had often slammed WorldCom as a poorly managed company. So I was surprised to hear him suddenly launch into a discussion of the pros and cons of a WorldCom-Sprint merger. He remained firmly in the theoretical, but it seemed -- to my ears at least -- that the pros outweighed the cons.
We all wanted to press him further on this, but just then our private time was over, and it was time for Esrey’s speech. He said nothing about any possible deals.
When the speech was over, my tablemates and I went out into the lobby for a break. Suddenly, the cell phone of one of the buy-side analysts rang insistently. It was a banker friend, calling from Germany, he said, who had heard a very specific rumor of a coming Sprint-WorldCom merger that would give Sprint 0.94 shares of WorldCom, or about $70 for each Sprint share, more than 50 percent above its current price. If true, it would be enormous, the biggest deal ever. My blood began to pump, fueled by a combination of fear, anger and excitement. How could someone in Germany already know something that had not yet been announced? I strained to hear more.
As we left the ballroom and descended the steps to the hotel lobby, we saw Jack Grubman coming through the front entrance of the hotel with two telecom analysts from two of the world’s largest mutual fund groups. Jack and the two buy-siders had gone out to eat, intentionally missing Bill Esrey’s speech and, of course, the chance to pick Esrey’s brain at dinner. How could they afford to skip out on these opportunities, which, after all, were the analyst’s bread and butter?
Agitated, adrenaline on overload, my buy-sider friend spotted Grubman and homed in like a heat-seeking missile. “I’m going to ask Jack,” he said. “Since this involves WorldCom, if it’s real, he’ll know for sure.” About 30 minutes later, I ran into the investor at the hotel bar. “Dan, Jack says those numbers are exactly right: 0.94 WorldCom shares for each Sprint share.”
The specificity of the rumor -- and Jack’s confirmation of it -- staggered me. Nothing had been announced. How could Jack know the exact ratio of the deal? Had a Salomon banker or someone from WorldCom tipped him off?
Suddenly, I had two big problems. First, I had a Neutral rating on Sprint’s stock. If the rumor was true, I would look pretty bad, since Sprint’s shares would trade way up once the deal was announced; $70 was a huge premium to Sprint’s current $46 stock price. Should I upgrade my Sprint rating based on what I had heard?
But there was a second, much bigger problem with that. If Jack’s confirmation was based on inside information, now I, too, was in possession of it. If I upgraded the shares, I could be using that inside information illegally. On the other hand, people traded on rumors all the time. Maybe Jack and these guys were simply dealing in gossip, which to my knowledge wasn’t illegal. I left my Neutral rating in place and decided to take my lumps if the merger actually happened. Better to be wrong than in stripes.
It took 16 days for the Wall Street Journal to sniff out the rumor. On September 24 the Journal printed a story speculating that WorldCom and Sprint executives were discussing a merger, causing Sprint shares to jump almost $4, or 8 percent, that day. But the two stocks had already moved, and some investors had already profited: In the 16 days before the Journal’s “scoop,” Sprint shares had risen by a total of $5.4 billion, or 6 3/16 per share; and WorldCom shares had dropped by $1.9 billion, or 93 cents per share. And the market value of Sprint PCS, also likely to be acquired in the transaction, rose $6.4 billion, or $6.75 per share during the same 16-day period.
Together, that added up to a total of $13.7 billion of shareholder value that had changed hands, with some investors winning thanks to their inside information and others losing thanks to their lack of it. After the article appeared, another 12 days passed before the deal was officially announced -- at, yes, exactly the ratio that the investor had heard and Jack Grubman had confirmed.
THE AMBUSH
In the meantime, my relatively skeptical reports and opinions apparently weren’t playing well in the executive suites of Merrill Lynch. As Salomon continued to win the lion’s share of telecom deals, David Komansky, Merrill’s CEO, couldn’t help but notice. Merrill had, earlier that year, hired Henry Blodget from Oppenheimer & Co. as its Internet analyst after his outrageous call that Amazon.com would go to $400 a share came true and anointed him the hottest name in Internet stocks. The banking that had begun to flow Merrill’s way as a result of his hiring made it all the more obvious that this wasn’t happening in my sector.
As more and more companies went public, there were more and more companies to cover. While our telecom team had expanded to six people to meet the demand, there were certain companies, like Level 3 Communications and other dot-com types, that just weren’t going to be covered by me -- partly because I didn’t have the time, partly because I thought they were overinflated blobs of nothingness and not necessarily telecom companies. This frustrated Merrill’s bankers and executives, of course.
Although I didn’t hear this story until years later, in the middle of 1999, David Komansky had a meeting with Tom Davis, who ran Merrill’s investment bank. Komansky apparently complained about Merrill’s low market share in telecom investment banking deals and asked what exactly was causing it to lag so far behind SSB’s. I don’t know if the words “Why can’t Dan be more like Jack?” were ever uttered, but that apparently was the strong implication.
A few months before the Sprint meeting, back in June 1999, Andy Melnick, Merrill’s director of research, came to me with a proposal to hire Tim Weller, one of Donaldson, Lufkin & Jenrette’s telecom analysts, to work side by side with me. The idea was simple: He could cover some of the newer stocks that I wasn’t interested in covering or didn’t have time to cover.
With a Ph.D. in electrical engineering from the University of Illinois, where he had studied with Mark Andreessen, the inventor of the Web browser and a co-founder of Netscape, Tim was one of the very few people on my side of the Street who could claim to understand the Internet. Perhaps for that reason, he was much more positively disposed toward the smaller dot-com telecom companies than I was. If he covered some of these stocks that I had refused to or that fell outside of my traditional coverage, that would lighten my team’s workload. It would also mean that Tim -- not I -- would have to deal with the crazy valuations the market had put on some of these Internet-related start-ups. And, of course, he would have to deal with the deal-crazed bankers trying to ramp up Merrill’s share of technology and telecom deals.
So Tim came to our offices to meet with Andy and me, and everything was going smoothly until we started talking about stock coverage. Tim said he wanted Level 3 and Qwest Communications as well as the Internet-type companies that I hadn’t been covering anyhow, some of which I hadn’t even heard of. They all made sense to me except for Qwest. “I’d love to get [Qwest CEO] Joe Nacchio off my back, but it’s a core company for me,” I said. “Qwest is buying US West; it’s a Bell company far more than it is a dot-com or Internet company.”
I went home and started to think that maybe there was something sinister going on here. Most distressing to me was the possibility that Merrill wanted to transfer responsibility for some of the stocks I covered to an analyst who might be more bullish. The more I thought about it, the more I worried. Why would they bring in someone of Tim’s caliber if they intended for me to stay?
But I felt a lot better when Rosemary Berkery, Andy’s coglobal research director, came to me a few weeks later and asked if a new, extended contract would make it easier for me. I asked Rosemary, a serious, hard-nosed professional who later became Merrill’s general counsel, to make it a four-year deal, one that would take me to my Spring 2003 early retirement target date. She said yes -- if I would agree to an exception that allowed Merrill to hire an analyst “with responsibility for companies engaged in Internet applications plus Qwest, Level 3 and up to two other companies engaged in or entering into similar businesses.” This meant Merrill could take away the new economy’s hot highfliers, even Global Crossing, but they couldn’t take any of my core companies, such as AT&T, WorldCom or the Baby Bells, and that satisfied me.
Yet it was all for naught. It turned out that Tim Weller wasn’t quite as interested in the job as he’d said he was. In August 1999 he accepted the CFO job at a red-hot Internet start-up called Akamai Technologies. When it went public at the end of October, Weller was suddenly worth more than $300 million on paper, making whatever he’d been negotiating for at Merrill a joke, at least until Akamai’s stock later collapsed. Still, the whole saga kept me on edge for a while. I couldn’t stop worrying. What did all this mean?
A PIECE OF THE ACTION AT CSFB
A ringing telephone quickly put an end to my anxiety. On the line was Al Jackson, global head of equity research at Credit Suisse First Boston. I didn’t know Al, but I did know that CSFB was a long-established investment bank that had hit hard times a few years earlier. It was now experiencing an amazing revival, thanks in large part to my old colleague Frank Quattrone.
CSFB had recruited Frank in 1998 from Deutsche Bank and now controlled the lion’s share of the technology and dot-com IPO business in Silicon Valley. But CSFB had lost its well-regarded telecom analyst, Frank Governali, to Goldman, Sachs & Co. earlier that year and had apparently struck out with everyone they had tried to hire. They hadn’t even thought of contacting me, since they believed I was very satisfied at Merrill. But nobody knew the real story.
“Dan, I’m sure you’re happy and Merrill is taking care of you,” Al said, “but I figured I’d go for a long shot and see if you wanted to talk. We are thinking big numbers.”
He told me what kind of money they were thinking about, which, it turned out, was close to where I already was. I told him so. “Tell you what, Dan,” he said, with disappointment in his voice. “Let me talk it over with some folks here and I might get back to you.” I figured that was the end of it, since they surely thought that Merrill would match anything CSFB offered.
To my surprise, Al called back a few days later and said he had gotten approval to talk to me about “much higher levels.” He invited me to have dinner with him, Chuck Ward, the co-head of the investment bank, and Brady Dougan, who was then the global head of the securities division and today runs CSFB.
So one evening in mid-September, I slipped into the CSFB building, the art deco former Met Life building at 25th and Madison, and headed up to the executive floor, where a private dining room had been reserved. Al, Chuck and Brady greeted me warmly. They said that they wanted to play off of their incredible momentum in the technology business, momentum that had bounced into their lives with the arrival of the inimitable Frank Quattrone and his team from Deutsche Bank. Quattrone’s organization handled everything from investment banking to brokerage for wealthy individuals to, yes, research, and had vaulted CSFB to the top of the league tables in the technology sector.
I had heard from other sources that Frank and his group had a “piece of the action” -- that is, the group’s compensation was an explicit percentage of the profits his group generated. Fifty percent was the rumor, but it turned out to be 33 percent of any revenues the group brought in over $150 million. In 1999, Frank’s group brought in $600 million, which meant Frank ended up with $150 million to divvy up between himself and his staff. Between 1998 and 2000, according to the National Association of Securities Dealers, Frank would personally rake in more than $200 million. At the time, I didn’t know what the numbers were, however.
The dinner went well and was followed by a 7:00 a.m. breakfast a week or so later at the Soho Grand Hotel, a great place to meet because Wall Streeters never went there, particularly not at 7:00 a.m. About midway through the breakfast, Brady Dougan pulled out a one-page set of sample contract terms. It offered two choices: one, a fixed contract like the one I had at Merrill but with a raise of about 60 percent, and another with some very unusual incentives. The men had hinted at something similar to Frank’s deal, and it turned out that they were willing to give me a percentage of any new telecom deal fees that CSFB landed in the sector.
I was stunned. I was an analyst, not a banker, yet they were proposing that I be paid on commission, just like a banker was. I would get a piece of whatever deals I brought in or indeed of any telecom deal at all, which seemed to create an obvious incentive to make my recommendations more bullish than they would otherwise be. If that happened, I’d be putting my financial interests first, ahead of my clients’. Was this the way others were being paid?
The breakfast ended with Al Jackson promising to get me a draft of the full contract within the next few days and me agreeing to meet more CSFB executives the following Friday.
So on October 15, I told my executive assistant, Connie, and my team that I would be working from home and spent a whole day upstairs in CSFB’s private dining room while the head salesmen, traders and others came upstairs to meet me. The next Monday afternoon I returned one last time for a meeting with Ernesto Cruz, then head of U.S. equity capital markets. We talked about the conference I’d been running at Merrill, which was of great interest to CSFB. Ernesto asked me how much I spent on the conference. When I told him $1 million, he laughed. “Frank spends over $2 million on his,” he said, referring to Frank Quattrone’s over-the-top technology investor conference held each November at the swanky Phoenician Resort in Scottsdale, Arizona.
Frank’s conference, which he had successfully moved from Morgan Stanley to Deutsche Bank and then to CSFB, was the most exclusive of all investor get-togethers, an absolutely sizzling ticket. In November of that year, Robin Williams would show up and perform for free -- just because he was an investor in one of Frank’s client’s funds and wanted to get in the door! Wow, I thought. I could throw one hell of a party with $2 million.
Finally, Allen Wheat, CSFB’s CEO, came in. Allen seemed to be a lot of fun, a motorcycle-riding New Mexico native who was extremely approachable and seemed sophisticated. He was very different from the street-smart David Komansky. He gave me the standard talk about how important telecom was and then mentioned how he liked to hire the best and let them do their job without interference. Now that was music to my ears. At first, I thought he meant he didn’t allow anyone to interfere with research analysts’ opinions. But it turned out he wasn’t talking about research. He was talking about giving his bankers and traders the freedom to make money any way they wanted to, as he did with Frank Quattrone and others.
While I was trying to figure out what to do, I was surprised, and I guess a little bit flattered, to receive a call from Frank. I hadn’t spoken to him since we were both at Morgan Stanley, but certainly life had changed for both of us, particularly him. Frank had become arguably the most influential banker in the entire world by now, the Jack Grubman of banking. He said that the technology group was anxious to work closely with the telecom group. It was a natural fit, he said, because the big telcos were such huge users of technology and telecom equipment.
He sounded incredibly open and friendly, and I had never had any sort of run-ins with him in the past. But I couldn’t help but wonder whether he might somehow try to influence my research. This worried me a lot.
While I was mulling this over, a FedEx package arrived at my home. Inside was the draft contract Al had promised at our last breakfast. Instead of a fixed salary and bonus, CSFB was offering me a piece of the action: 2.5 percent of any telecom fees earned by CSFB above $150 million per year. Given the current rate of IPOs and deals that the bank was bringing in, this had the potential to be one amazingly lucrative offer. A doubling of CSFB’s telecom investment banking business to $300 million in the next year, for example, which was entirely possible, would mean an extra $3.75 million in my pocket. There were also payments for an II [All-America Research Team] ranking of No. 1, 2 or 3 and additional incentives if CSFB ranked in the top five spots in three different league tables: telecom M&A, telecom stock underwriting and telecom junk-bond underwriting. At our last breakfast I had suggested some sort of bonus tied to the performance of my stock recommendations. Oddly, that was the one incentive that didn’t show up in this letter.
If there ever was a way to codify a conflict of interest, this letter sure was it. I wondered if I should even bother dancing with these guys. On the other hand, the financial upside might be dramatic. Was this the temptation that would send me to the other side?
I wanted to see the unbiased reaction of my wife, Paula, to these enormous numbers. Careful to keep a straight face, I gave her the offer letter. After reading the relevant paragraphs, it took her about five seconds to make up her mind. “This looks like a huge conflict of interest. No way you can take it,” she said, as clear-minded and matter-of-fact as always.
Brady, Al and I met again on November 5. I told them my lawyer (always blame the lawyer) had advised me to request that four items be added to the contract.
The first was that I wanted my team and me to report to Al. I did not want to report to Frank Quattrone. I was sure that having a banker as a boss would create more pressure than ever to be bullish on the stocks I covered. Brady said “fine.” Al smiled. He was clearly relieved that telecom stocks would remain under his watch.
The second item related to my team. I wanted to bring over six of them at roughly the same percentage pay increase as I was getting. Al said no problem.
The third item was a guaranteed minimum budget for my staff in terms of both head count and aggregate compensation. This was extremely important because it would enable me to protect my team even if hard times hit CSFB. Brady had no problem with the concept.
The final item I held for last because it was the most important and I didn’t want to bring it up until everyone thought the deal was done. It was that incentivized bonus scheme. “I’m good to go on virtually everything,” I started. “Except my wife and I had a long talk. She’s just not comfortable with the banking incentives and I agree. So I’d like to go back to the fixed deal, but, given how the incentives have gone up, can we increase the annual fixed amounts by 25 percent to equalize the two offers?”
I was rejecting a contract that would have paid me as much as 40 percent more than the fixed contract would over the four years. But the CSFB guys were true pragmatists. They didn’t care what I did as long as I decided to come with them. Fine, they said. What ever works for you is fine. And the 25 percent? That’s fine too.
At the end, I had what amounted to a doubling of my pay package from Merrill and roughly the same for the members of my team. It was truly crazy. My contract had no upside opportunity for banking, for making No. 1 in II or even for picking stocks well. Likewise there was no downside risk even if the bankers -- or their corporate clients -- were not happy with my investment opinions.
My departure must have set off a bit of a panic inside Merrill. I heard that within 24 hours of my leaving, several people, including my friend Linda Runyon Mutschler, the No. 1 wireless analyst, had their pay packages instantly doubled.
THE $1.5 MILLION MISTAKE
Several days after starting at CSFB, I was looking over my contract when I saw a number that stopped me cold. It looked as if CSFB had made a mathematical mistake. We had agreed to a deal that would compensate me for the unvested Merrill Lynch stock and options I had left behind. Amazingly, there was a $1.5 million error -- in my favor!
So that evening, I left CSFB’s Brady Dougan a voice mail. “I want to let you know there is an error in the final contract. The make-whole award is $1.5 million too high by my calculation,” I said. I figured Brady would forward my message to the right people and then send me a quick response, saying something like “Thanks, Dan. You are an honorable man and you are already making CSFB proud.” But there was no response. A few days later, a new contract arrived, exactly $1.5 million lighter.
I never heard a word about it, not from Al or Brady or anyone. On Wall Street honesty doesn’t raise an eyebrow, even when it involves over a million dollars. I guess it should surprise no one that dishonesty goes unnoticed as well. There really is no right and wrong on Wall Street, I thought to myself. Just money.
From the forthcoming book CONFESSIONS OF A WALL STREET ANALYST by Dan Reingold with Jennifer Reingold. Copyright © 2006 by Daniel Reingold. Published by arrangement with Collins, an imprint of HarperCollins Publishers.
