Part 1 (1/2)

Confessions of a Wall Street analyst

A True Story of Inside Information and Corruption in the Stock Market

by DAN REINGOLD

Prologue

TUESDAY, MARCH 15, 2005 15, 2005

IT WAS JUDGMENT DAY for Bernie Ebbers, but no one knew it yet for Bernie Ebbers, but no one knew it yet

As I walked into Courtroom 318 of the federal courthouse in Manhattan and tookday of waiting It was the eighth week of Bernie's crihth 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 hihter, Carly Two of Bernie's own daughters, Joy and Faith, had sat through ht before

The events of the previous few years had been rough for the one-tiht sluer; his hair and beard had gotten decidedly grayer; his paunch sagged But oddly, Bernie didn't seem preoccupied by the fact that at thathis fate Seely absorbed in a novel, his lined face was totally expressionless It was strange: I had known the ularly for years, but after all this time, I still found him inscrutable

The trial was the final act in a rea Bernie Ebbers, a one-tih school basketball coach in rural Mississippi, had taken a tiny long distance coest 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 telecoone from a hero to a villain, his reputation as a master of the deal replaced by that of the est 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 theup, Bernie?” I asked

”Fine, Dan,” he said, turning and looking ,” he said, his face stoic, his voice even ”I just have to stand in front ofwrong”

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 knehat Scott was doing” I was referring to Scott Sullivan, WorldCouilty to nues related to WorldCo hi about what had happened I was as anxious to know the truth as anyone The news of WorldCo 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 nu 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 co its numbers to the tune of billions of dollars, and none of us had figured it out

”Dan,” Bernie said, ”perhaps I should have should have known, but I didn't It's just a sha is so sad” known, but I didn't It's just a sha 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 ame I felt infuriated as I listened to him shi+rk 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 see about the massive deception

You see, WorldCoer and an intense curiosity to understand what had really happened I had been the lead telecoest 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 stocknewspapers and broadcast on CNBC and on teleconferences that were beamed to thousands of retail brokers, savvy professionalpress I had been at the top of s 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 ca cheerleader for WorldCom's stock for nearly a decade, and I, too, had recommended its stock for three years, frons of trouble

Now those days were long gone The only people whose opinionsin the jury roo 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 la on at the same time in the sa lunch in the building's cafeteria when I looked up to see Bernie and his fae, 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 co with Bernie's wife and her daughter outside the courtroom when a reporter suddenly darted out and told us that the stenographer had just co was about to happen Perhaps it was as har for Domino's Pizza for lunch instead of that lousy cafeteria food That one had gotten sohs a few days back

But today, the jury had discussed hty 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

IN 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 ood fortune of arriving on Wall Street at the beginning of a historic bullwhen it was in ruins I'd witnessed-and been a part of-the transforlamorous ind of s 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 loston private planes around the globe, eating in the finest restaurants, and sitting in front row seats at World Series games, US Open tennis championshi+ps, and Madonna concerts I'd even been an unwitting catalyst for a series of sexually explicit e- Jack Grub to the unplanned retireroup CEO Sandy Weill 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 ood fortune of arriving on Wall Street at the beginning of a historic bullwhen it was in ruins I'd witnessed-and been a part of-the transforlamorous ind of s 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 loston private planes around the globe, eating in the finest restaurants, and sitting in front row seats at World Series games, US Open tennis championshi+ps, and Madonna concerts I'd even been an unwitting catalyst for a series of sexually explicit e- Jack Grub to the unplanned retireroup 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 ed up in a devastating mix of fraud, unethical behavior, overopti of the telecom bubble cost investors far more money and jobs than the dot-com crash and most other nominious 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 aith far more money than I had ever yearned for or deserved In the two years since retiring fro, took a few classes, and spent lots of quality tis I had far too little time for when I worked on the Street But I res 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 siators had focused on so-fraud at WorldConored 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 Co, nor did anyone follow the chain of responsibility for these actions as high as it ressions that rossly unfair went unpunished and uncorrected

Hence this book

IT 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 neorld in the same way a neorld 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: that will take you into the inner sanctum of Wall Street, a book that I hope will open a door to a neorld in the same way a neorld opened up to me when I took my first job as a Wall Street analyst in 1989 and soon received the first of , Dan Don't let anyone, not even your staff or your fas, it would become clear that a coer, an acquisition, or a big financing with the help of my investment bank, and that the company wanted”over the Wall,” referring to the ”Chinese Wall” that was supposed to keep confidential, inside infor into the hands of soain I went over the Wallyou over the Wall, too-the wall that conceals and protects how Wall Street really really works works

As I write, the telecons 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 teht their firms numerous lawsuits and billions in fines Boards of directors have been reshuffled Ethics policies have been ied 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 governers in the telecoain headline the news

It seems like a whole neorld 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 so brought to account and that investment banks and the analysts ork 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 evenon at all And no one has explained how cri-for the majority of people who broke the rules

Nor has anyone exposed the unfair, often illegal use of inside inforrew out of control during my years on the Street, but no one has successfully pursued its abuse, not even Eliot Spitzer, one of the s 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 tie of co troubles let them cash out of their coaht have gained an edge in some situations but found themselves shut out in many others Above all, it was-and remains-es that follow, I'll share my front-row seat at one of the ic-periods in financial history I will share details of life on Wall Street that few can risk disclosing for fear of i themselves I'll explain what it was like to be at the epicenter of thewith fellow Wall Streeters Jack Grubet, and uberbanker Frank Quattrone; teleco, WorldCom's Ebbers, and Qwest's Joe Nacchio; and Street bosses such as Merrill Lynch's David Koan

I'll show a Wall Street that was a jungle of greed and ego, a place bri with conflicts, and a place that was absurdly out of touch with the Main Street it claimed to serve It was an environment in which pay levels spiraled out of control, where 30-year-olds earned seven figures, and where no one noticed an extra 15 million inadvertently inserted into my own employment contract It was an environment in which an insider tip could yield billions of illicit stockIt was an environe Cority of the financial est wave of Wall Street conflicts of interest ever And it was an environment in which ethical standards had fallen so low that not only was it difficult to do the right thing but often it was difficult to even discern the line between right and wrong

What you'll learn in these pages is so this book, I have had to relive ment calls, and ethical choices I made Sometimes those meed with eeous, others hilarious, and many are simply absurd Such was life inside the telecom bubble