Confessions of a Wall Street Analyst (2 page)

TUESDAY, MARCH
15, 2005

I
T WAS JUDGMENT DAY
for Bernie Ebbers, but no one knew it yet.

As I walked into Courtroom 318 of the federal courthouse in Manhattan and took my usual seat in the gallery, it looked like just another long day of waiting. It was the eighth week of Bernie’s criminal trial and the eighth day of the jury’s deliberations. The stakes were huge: if convicted of all nine counts of conspiracy, securities fraud, and filing false financial statements, the 63-year-old former CEO of WorldCom would likely live out his final days, not on a yacht or on his vast ranch in Canada, but in a federal prison cell.

I stared at Bernie as he sat at the defendant’s table, flanked protectively by his high-priced lawyers. Behind him sat his wife of six years, Kristie, and her 20-year-old daughter, Carly. Two of Bernie’s own daughters, Joy and Faith, had sat through much of the vigil but had flown home the night before.

The events of the previous few years had been rough for the one-time billionaire. A slight slump had replaced his once-jaunty swagger; his hair and beard had gotten decidedly grayer; his paunch sagged. But oddly, Bernie didn’t seem preoccupied by the fact that at that moment twelve random individuals were determining his fate. Seemingly absorbed in a novel, his lined face was totally expressionless. It was strange: I had known the man since
1993 and had clashed with him regularly for years, but after all this time, I still found him inscrutable.

The trial was the final act in a remarkable rags-to-riches-to-rags saga. Bernie Ebbers, a one-time milkman and high school basketball coach in rural Mississippi, had taken a tiny long distance company and built it into MCI WorldCom Inc., the second largest telecommunications company in the world behind AT&T. He had become a billionaire, a celebrity, the CEO atop the mountain, at a time when his industry and mine—telecom—was one of the sexiest in the world.

But by mid-2002, his company had collapsed in a web of lies and deception. Over $180 billion in shareholder value had evaporated. Over 30,000 WorldCom employees and nearly 200,000 others at related companies had lost their jobs in the telecom bust that followed. And Bernie had gone from a hero to a villain, his reputation as a master of the deal replaced by that of the man who presided over the biggest fraud in history.

Although Bernie and I had never much liked each other, we’d struck up an odd camaraderie in the courtroom, where we’d make small talk or discuss the most recent testimony. Early on in the trial, I ran into Bernie in the men’s room, of all places. “How are you holding up, Bernie?” I asked.

“Fine, Dan,” he said, turning and looking me in the eye.

“Dan, I know one thing,” he said, his face stoic, his voice even. “I just have to stand in front of my God, whenever that comes. I know I didn’t do anything wrong.”

We both walked over to the sink to wash our hands.

“Bernie, based on what I’ve heard in the opening arguments,” I said, “I don’t see evidence that you knew what Scott was doing.” I was referring to Scott Sullivan, WorldCom’s former CFO, who had already pleaded guilty to numerous criminal charges related to WorldCom’s multibillion-dollar accounting fraud.

I was baiting him, of course, hoping he’d tell me something, anything about what had happened. I was as anxious to know the truth as anyone. The news of WorldCom’s massive accounting fraud had shocked me to the core. How could I have missed it?

My job as a research analyst on Wall Street had been to understand the numbers. Though I certainly hadn’t believed everything Bernie had said over the years, I’d never had reason to question the authenticity of the financial information the company reported. Nor, unfortunately, had the other Wall Street analysts, the bankers, the lawyers, or even the auditors. Bernie’s com
pany had been faking its numbers to the tune of billions of dollars, and none of us had figured it out.

“Dan,” Bernie said, “perhaps I
should have
known, but I didn’t. It’s just a shame, a damn shame. This whole thing is so sad.”

He was definitely right on both counts. He should have known. And it sure was sad. Of all the sad things that I had witnessed as the telecom bubble burst, the collapse of WorldCom was most decidedly the saddest, with so many people’s livelihoods destroyed by this evil numbers game. I felt infuriated as I listened to him shirk off any responsibility for this horrible situation; no matter what the jury decided, all of this had happened on Bernie’s watch and Bernie’s watch alone. Although the evidence seemed circumstantial and uncorroborated, at the same time it seemed incomprehensible to me that he hadn’t known something about the massive deception.

You see, WorldCom was part of my legacy too. I was driven by both anger and an intense curiosity to understand what had really happened. I had been the lead telecommunications analyst for several of the world’s largest and most powerful Wall Street investment banks. It had been my job to analyze the investment prospects of WorldCom and other telecom companies and recommend whether clients should buy, sell, or hold their shares. I took those responsibilities very seriously.

For many years, my research reports and recommendations influenced the way in which billions of dollars were invested in the stock market. My views were printed in leading newspapers and broadcast on CNBC and on teleconferences that were beamed to thousands of retail brokers, savvy professional money managers, and the adoring press. I had been at the top of my field, trading the top rankings with my archrival, Salomon Smith Barney’s Jack Grubman, a man who had a radically different view of the role of the analyst from mine. But that didn’t help either of us when it came to WorldCom’s fraud. Jack had been the leading cheerleader for WorldCom’s stock for nearly a decade, and I, too, had recommended its stock for three years, from late 1997 until mid-2000, when the company began to show signs of trouble.

Now those days were long gone. The only people whose opinions mattered were the twelve New Yorkers deliberating in the jury room, strangers who, before the trial, knew little or nothing about WorldCom, the telecommunications industry, Wall Street, or Bernie Ebbers. They had often looked bored and confused, probably wondering how they’d had the bad luck to get roped into this accounting mess instead of getting to weigh in on glamorous
rapper Lil’ Kim’s perjury trial, which was going on at the same time in the same courthouse, one floor below.

One day I was eating lunch in the building’s cafeteria when I looked up to see Bernie and his family setting their trays down near Lil’ Kim and her entourage, each clueless as to the other’s existence. Finally, Bernie’s stepdaughter, Carly, realized who Lil’ Kim was and struck up a conversation. It was both hilarious and sad to realize how much the rap star and the business star, inhabitants of such disparate worlds, suddenly had in common.

At about 12:20 PM on March 15, I was chatting with Bernie’s wife and her daughter outside the courtroom when a reporter suddenly darted out and told us that the stenographer had just come in. That, I had learned, was a sure sign that something was about to happen. Perhaps it was as harmless as a note from the jury requesting documents or asking for Domino’s Pizza for lunch instead of that lousy cafeteria food. That one had gotten some laughs a few days back.

But today, the jury had discussed more weighty matters than the merits of pepperoni versus mushrooms. We all hustled back into the courtroom and took our seats. A few minutes later, the court clerk strode purposefully out of the chambers.

“We have a verdict,” he announced.

A frisson of energy rippled through the room.

They had a verdict.

I
N APRIL
2003, I quit Wall Street after 14 years as an analyst and more than two decades in the telecom industry. I’d experienced one of the most dramatic rides in financial history, having had the good fortune of arriving on Wall Street at the beginning of a historic bull market and the misfortune of leaving when it was in ruins. I’d witnessed—and been a part of—the transformation of telecom from a sclerotic, regulated backwater to a glamorous whirlwind of massive M&A deals and Internet-crazed public stock offerings. I’d experienced firsthand the transformation of the stock analyst from a backroom number cruncher to a rainmaker whose recommendations were followed breathlessly and who often determined whether an investment bank won or lost multibillion-dollar deals. I’d lived the lush life, traveling on private planes around the globe, eating in the finest restaurants, and sitting in front row seats at World Series games, US Open tennis championships, and Madonna concerts. I’d even been an unwitting catalyst for a series of
sexually explicit e-mails that would rock Wall Street, bringing Jack Grubman to his knees and contributing to the unplanned retirement of his boss, Citigroup CEO Sandy Weill.

But the flip side was a world where work never stopped, where I was literally on call at any time and any place. I was part of an industry and profession that was swallowed up in a devastating mix of fraud, unethical behavior, overoptimism, and financial mismanagement. The bursting of the telecom bubble cost investors far more money and jobs than the dot-com crash and most other market meltdowns in history. And WorldCom was only one ignominious part of this story.

By the time I left my last Wall Street firm, Credit Suisse First Boston (CSFB), I was burned out by the headlong pace and depressed by the beating my profession had taken. But I had also benefited immensely. I walked away with far more money than I had ever yearned for or deserved. In the two years since retiring from the Street, I did some teaching, took a few classes, and spent lots of quality time with my wife, Paula, and our two daughters—things I had far too little time for when I worked on the Street. But I remained intensely frustrated by all the wrongs that had still not been righted. The way the telecom bubble and the rash of conflicted behavior by Wall Street analysts had been portrayed was simplistic and often wrong. The investigators had focused on some types of wrongdoing—fraud at WorldCom and dishonest research on the Street—but had ignored other equally egregious practices, such as the leaking of inside information, which were at the core of the Wall Street scandals of the 1980s but never really went away.

Many people were never called to account, and many practices apparently escaped the attention of New York’s attorney general, Eliot Spitzer, and the Securities and Exchange Commission. No one ever explained what really went wrong, nor did anyone follow the chain of responsibility for these actions as high as it might go. Many of the worst transgressions that make our markets grossly unfair went unpunished and uncorrected.

Hence this book.

I
T IS A BOOK
that will take you into the inner sanctum of Wall Street, a book that I hope will open a door to a new world in the same way a new world opened up to me when I took my first job as a Wall Street analyst in 1989 and soon received the first of many cryptic calls:

“Come immediately to a meeting, Dan. Don’t let anyone, not even your staff or your family, know where you’re going.”

At such meetings, it would become clear that a company was about to undertake a major move such as a merger, an acquisition, or a big financing with the help of my investment bank, and that the company wanted my advice. On Wall Street, this experience was called going “over the Wall,” referring to the “Chinese Wall” that was supposed to keep confidential, inside information obtained by an investment banker from falling into the hands of someone who could use it for unfair gain. I went over the Wall many times in my career. And this book will bring you over the Wall, too—the wall that conceals and protects how Wall Street
really
works.

As I write, the telecom and financial worlds are showing signs of life. A few stocks, such as Google, the Internet search engine, are defying gravity once again. Investment banks have restructured in an attempt to keep analysts from the types of temptations and conflicts of interest that brought their firms numerous lawsuits and billions in fines. Boards of directors have been reshuffled. Ethics policies have been implemented and laws changed. Some of the most lurid corporate scandals of the early twenty-first century, from Tyco and Adelphia to WorldCom and Enron, have finally reached all the way to the tops of those organizations, thanks in part to the zealous efforts of government prosecutors. And mega-billion-dollar mergers in the telecom industry once again headline the news.

It seems like a whole new world. And indeed, it is certainly true that the Street has changed in some ways, ways that make it a little less vulnerable to overt fraud. It is also true that some executives of some corrupt companies are finally being brought to account and that investment banks and the analysts who work for them are under much more scrutiny than ever before.

But let’s not be fooled. There remain many conflicts, leaks, and abuses of the law—and of investors’ trust—that have never been exposed. No one has fully explained why the remedies offered and prosecutions undertaken thus far will not solve the problems inherent on Wall Street. No one has fully explained how investors play on an unbalanced and unfair playing field, a field that individuals and even many professional investors have no business playing on at all. And no one has explained how crime paid—and paid big—for the majority of people who broke the rules.

Nor has anyone exposed the unfair, often illegal use of inside information. The misuse of inside information grew out of control during my years
on the Street, but no one has successfully pursued its abuse, not even Eliot Spitzer, one of the most aggressive investigators of corporate wrongdoings in history.

Sometimes the beneficiaries were professional institutional investors. Sometimes the benefits flowed to Wall Street analysts, who used inside information to parlay themselves into positions of power and influence in the stock market. At other times, it was corporate executives, whose advance knowledge of coming troubles let them cash out of their company’s stock ahead of all other investors. This insider’s game was never fair, not even for the professionals, who might have gained an edge in some situations but found themselves shut out in many others. Above all, it was—and remains—most unfair for the individual investor.