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Frank Quattrone, the former star investment banker at Credit Suisse First Boston (CSFB) during the internet stock bubble, was sentenced two weeks ago to 18 months in prison in New York after a federal judge ruled that he had lied during testimony in his obstruction of justice trial. The harshness of the sentence stunned Quattrone’s supporters, who view him as a scapegoat for the sins of Wall Street during the boom years.
The trial of Silicon Valley’s most powerful financier was monitored by lawyers on both sides of the Atlantic when David Brodsky, now a partner at Latham & Watkins but formerly general counsel for CSFB, turned star government witness. Quattrone was investigated over flotations carried out during the tech boom. The trial’s smoking gun was the briefest of emails, in which he had advised colleagues to “clean up those files” before the holidays.
As one commentator put it at the time, Brodsky’s testimony on the bank’s document retention policy signified “another nail in the coffin of the hallowed attorney-client privilege following the publication of Sarbanes-Oxley”. The saga had echoes of a case closer to home: that of Andrew Foyle, the Lovells partner who advised British American Tobacco on its document retention policy. Foyle, who has been asked to provide evidence in the colossal lawsuit filed by the US government against a handful of the world’s largest tobacco giants, has been claiming the protection of privilege. There is no suggestion that Foyle or Lovells have acted improperly.
Like Martha Stewart, the dotcom banker was sent down for the things he did to throw a criminal investigation off the scent and not for the acts that were actually being investigated. Earlier this year, Stewart, boss of her own media empire, and her stockbroker Peter Bacanovic, were sentenced to five months in jail and five months’ house arrest for obstruction of justice. Quattrone argued that he was simply reminding staff to follow the bank’s document retention policy, whereas the prosecution successfully countered that it was an attempt to destroy evidence while CSFB was being investigated by the Securities and Exchange Commission. He is the first high-profile banker to face prison time for the widespread abuses that took place on Wall Street during the late 1990s.
Lawyers take different views as to whether privilege was unfairly overridden or not. Thomas Ajamie, a senior partner at Texan firm Ajamie, specialises in representing shareholders seeking to recover losses in stock fraud cases and attended the Stewart trial and that of her friend Sam Waksal, boss of ImClone, who is serving seven years for insider trading. “Our privilege, like your system, distinguishes between the lawyer advising a client as to past crimes and helping to put together a defence and, on the other hand, helping a client commit a crime and being a part of a fraud or crime,” says Ajamie. “[Waksal] was using lawyers to help him in the course of a fraud or a crime, and that’s the exception to the rule. I believe in that exception, otherwise lawyers get caught up in advising clients how to commit crimes.
“There’s definitely a sentiment among federal court judges that there’s been a complete disregard of the respect for the court system and there are a lot of people on Wall Street that don’t follow the rules, and in some respects they mock them,” Ajamie continues.
“When they fear litigation is imminent, they destroy documents, and when they take an oath to tell the truth, they flat-out lie. Some judges are just not going to stand for that any longer.”
Mark Zauderer, a litigator with New York firm Piper Rudnick, does not see any “novel invasion” of the principle. “Attorney-client privilege is alive and well; however, there’s no question there’s going to be an intersection of some of the principles that underline privilege and the reporting obligations that arise under Sarbanes-Oxley,” he says.
The coffin of privilege was “nailed in a long time ago” when CSFB waived privilege over a year ago, reflects Aaron Marcu, the coordinator of Covington & Burling’s white collar practice group. “But the fact that the general counsel of CSFB was required to testify about what were otherwise privileged communications presents very troubling implications, insofar as the world has developed to a point where companies feel enormous pressure to waive privilege to avoid indictment,” he says. “It gives a lot of power to the government.”
So what do lawyers make of a sentence of 18 months for sending what one defence lawyer called “a 22-word bureaucratic snippet”?
“The judge really came down with a hammer,” reckons Zauderer. The time exceeded federal guidelines of 10-16 months because District Judge Richard Owen reckoned that it was “crystal clear” Quattrone had been untruthful when giving testimony. However, Zauderer was not surprised at the sentence. “The judge found he lied on the witness stand and therefore enhanced the sentence – and he was probably within the range of his discretion,” he adds. According to Marcu, the conviction of such a senior Wall Street player for “something as narrow as sending one email urging people to clean their files” is a “real wake-up call”.
For trial lawyers, the disastrously counter-productive nature of Quattrone’s own testimony has its own lessons. “Are we reaching a point in our jurisprudence where any defendant who exercises his or her constitutional right to take the witness stand to say they didn’t do it, if things go wrong, they will be punished beyond what they were going to be punished?” asks Michael Feldberg, the New York-based head of Allen & Overy’s US litigation practice. Feldberg believes that Quattrone has “a substantially better than average” chance of reversing the decision on appeal, because the meaning of such a brief email has to be “a fairly subjective proposition”. “There’s a perfectly innocent explanation for the email. It certainly isn’t the only explanation, but it has many ambiguities – and for this a man is going to jail in the next 45 days,” he adds. He was convicted after a second trial because the first ended with a hung jury.
Zauderer, who is also chair of New York’s Commission on the Jury, also sees the case as a graphic illustration of the dangers in the US system of the defendant choosing to take the witness stand.
“Hindsight is 20-20,” he reflects. “If Quattrone had been acquitted, people would have said what a wonderful decision it would have been to take the stand. Nonetheless, his sentence was enhanced by virtue of the fact that the judge didn’t find him credible.”
For the lawyer, the message for the Wall Street community and the public at large is how seriously the courts now take obstruction to justice, following the Stewart case and most spectacularly the Arthur Andersen case, where the accounting firm was destroyed not by charges related to its audits of Enron, but by a jury’s finding that staff shredded documents. “The convictions weren’t for the primary offences but for collateral issues, such as obstruction of justice,” Zauderer says. And, of course, it is far easier to nail someone for getting in the way of an investigation than it is to hang a case on some esoteric point of law. “It’s something that jurors understand much more easily as opposed to the complexity of financial transactions,” he adds.