by David Lender
New York City. “To the printer’s,” Cole said as he, Howard Blaine and Richard collapsed into a limo at 9:00 p.m. that night at JFK. Richard had never been in a stretch limo before. The driver took them to Bowne & Co.’s office on Varick Street and they went upstairs to an enormous conference room filled with the rest of the Southwest IPO deal team—attorneys representing Southwest and Walker, Southwest’s General Counsel and CFO, and other Walker professionals—to make final the IPO prospectus that was to be filed with the SEC in the morning. Printer’s drafts of the prospectus were scattered on the table. Luggage sat against the walls. The place smelled of ink and sweat.
The second hour went like the first one, and the next six after that: Richard observing, following along as everyone read each successive draft of the documents; Richard generally unsure what people were doing or talking about; Richard amazed that Cole kept pushing a button on the wall and some gray-faced schlub in saggy-assed pants showed up to take his and Blaine’s drink orders, that Ron Elman, Walker’s senior Real Estate MD picked his nose, then tore matches from the CFO’s pack and picked his ears, then mocked Richard for loosening his tie; Richard finally making a suggestion in the drafting and everyone acting like he’d never spoken, hell, like he was invisible.
At 5:30 a.m., after rubbing tummies as hard as he could for the last few days, Richard’s ego finally surfaced. “Why are you only using me as a gopher? Why won’t you let me make a little more of a contribution?” Richard said to Cole as they waited in the limo for Jeannie Peters to come downstairs.
“You’re an amoeba,” Cole said. “You don’t know anything. You’re excess baggage at this point.”
Richard felt it like a slap from the back of Cole’s hand: not meant to hurt him, just insult him. He fumed in silence. Jeannie got in.
“Hey,” Cole said to her.
“Hey.”
Richard looked up but Jeannie ignored him. She and Cole both extended their legs full-length from the back seat of the stretch limo to the foot rests. Richard sat facing them on the fold-down seat. He had to shift sideways to avoid Cole’s loafers. Cole never looked at him.
“Tired,” he said to Jeannie.
“Too tired for a nightcap?”
“Maybe one.”
She smiled back like it meant more than a nightcap. After that they drove uptown in silence.
“Good night,” Richard said when they arrived at his apartment building. They didn’t make eye contact. No response, not even a nod, a word or a perceptible movement of their feet. Richard’s ears burned red and his jaw set rigid with anger and hurt as he climbed out of the limo.
As he entered his building it was more than his exhaustion that burned moist in his eyes. His pride stung, and he felt trapped in Jeannie’s sadism, Cole’s nastiness, his hatred of Ron Elman and his 55-year-old adolescent comments, and the collective arrogance of the industry he’d chosen for himself.
In bed he screamed from his guts with his face down in the pillow. It made both his head and his heart feel lighter. He figured investment bankers didn’t do things like that, but he did it again anyhow.
Washington, D.C. Roman Croonquist finished reviewing the Wells Notice on the Boston Financial Arts case that his new Enforcement Assistants, Starsky and Hutch—it was easier than remembering their real names, and they seemed to enjoy the monikers—had drafted for him.
He liked these kids. They reminded him of his peers and himself when he’d interned under the SEC’s legendary Enforcement chief, Stanley Sporkin, back in the 1980s. Croonquist had done two stints under Sporkin: the first when he was an undergraduate Poli Sci major at George Washington University, the second when he was in second year law at Georgetown. The second time around he was proud to be one of the few interns required to wear a beeper under the hard-ass regime of Sporkin.
He remembered the way Sporkin talked about the go-go years of the 1960s when he was coming up, how the SEC brought down a number of the major conglomerate builders of that era with a flurry of litigation. Sporkin would pace back and forth in his office in front of a few young staff members, railing against the abuses of those early takeover artists. Then he would fire them up with challenges about bagging the current-day bad guys.
Croonquist intentionally tried to create a similar esprit for his staff. He wrote “Culture” at the top of his to-do list each day for the six years he’d held the top Enforcement job, a constant reminder to himself that a culture of commitment started at the top. That’s why he worked directly with a couple of the younger staff members each year. It was a way of planting seeds, letting the message grow up through the organization. And it also made the more seasoned guys compete for time in front of the boss, which kept them from getting lazy. Now, looking up from the draft across his desk at Starsky and Hutch, he chuckled. Their Starbucks coffees stood on his desk; they couldn’t bring themselves to drink the crap that Croonquist did from the kitchenette. Which was why they were always late. In Croonquist’s day, the boss wanted you in by 8:00 a.m., you were there. Not today; the Starbucks generation didn’t get into the office until it was done waiting in line at Fourth and F Street NE for its Brazilian Mocha.
“Not a bad first draft.” He nodded at Starsky and Hutch. “Okay, I’ll send you my comments after the staff meeting.” He nodded again and they got up and left.
He looked at his watch. He’d do a quick scan of MarketWatch before the staff meeting. He turned to the monitor and typed in the keys to see if the software flagged anything unusual the previous day.
It showed about a dozen stock ticker symbols, six with big volume and correlation coefficients above 75%, meaning they were suspicious. He double clicked on the first ticker symbol. The company was Pulte Homes, a homebuilder. After he clicked on the second ticker symbol, he didn’t need to go any further, because all six ticker symbols with suspicious volume showed up on the list of homebuilding industry competitors. A half dozen homebuilders, all the subjects of unusual trading. He loaded all the tickers into another screen and ran the subroutine to access the identities of the firms doing the trading.
Eight firms showed up consistently, including Walker & Company and GCG. A few more minutes research showed the others were a London brokerage firm, two Swiss banks and a few Cayman Islands banks. Almost all offshore. Interesting. If they were trading a single stock, the data would be screaming at him that something fishy was going on. He felt his pulse quicken. He slid open his bottom desk drawer and reached in for handful of pistachios, then stopped himself. He looked at his watch: 8:25 a.m. Time to get out of here. He typed in all six ticker symbols to initiate ongoing monitoring.
He stood up and started toward the door. He’d check into it more deeply after the meeting. Maybe it was just a big hedge fund playing the sector, but it was worth keeping an eye on. Then he smiled. His gut told him it was more than that: the chase was on.
Boston, Massachusetts. Richard learned that Cole and Blaine had played tennis the morning after the printer’s. The definition of Wall Street cool: hotshots in tennis whites nonchalantly playing off hangovers and an all-nighter at the printer’s. Hey, look at us, we just filed a 1.2 billion dollar IPO. Richard hoped he’d never be that big an asshole.
On Monday morning, Richard accompanied Cole on the Southwest Homes road show—five days of presentations by Southwest’s senior management to prospective institutional investors in the stock of Southwest when it became publicly traded in the IPO. In the ballroom at the Ritz-Carlton in Boston, the first road show stop, Cole pushed Richard into position near the door and had him pass out selling memoranda to everyone. Here, Spot, go fetch.
“I said hand them to everyone,” Cole said just before the presentation was to begin. Then he saw Cole’s eyes brighten as he looked over Richard’s shoulder. Richard turned to see Milner walking in with Rusty Munger, Southwest’s CEO.
“Harold,” Cole said, stepping toward him and extending his hand.
Falling all over himself.
“Hi, Harold,”
Richard said.
Cole gave Richard his best icy stare square in the eye. “Just do your job,” he whispered. “I’ll tend to the clients. Do I need to remind you of your status, probational?”
Richard cut him off by turning back toward the door. He promised himself he’d remember this guy. He’d probably always hold Richard’s “probational” status over his head. In fact, he’d learned that last year Cole was responsible for washing out all three probational hires. And now he probably had Richard in his cross hairs. As long as it took, if Richard ever got the chance he’d cut this bastard Cole off at the knees. He thought about what Dad would say to that, then felt bad. A second later decided he’d do it without Dad ever finding out. Then he decided Cole wasn’t worth the trouble after all; just walk over to the prick and tell him to take a flying fuck at the moon.
Richard took a deep breath, exhaled and handed a selling memorandum to the next guy who walked in the door.
After Boston came Philadelphia, Chicago, Minneapolis, Denver, Seattle, Los Angeles and then back to New York. Eight cities in five days. Richard didn’t think it was possible.
In Philadelphia Richard noticed three guys in the audience wearing investor name tags that showed up asking the same questions in Chicago and Minneapolis, questions that Southwest’s CEO just happened to have great answers to. Funny how they asked the same questions at the institutional breakfasts, lunches and meetings in Denver, Seattle and L.A. He wondered if this was how Wall Street really worked.
Washington, D.C. Croonquist arrived at his office earlier than usual, 7:15 a.m., because he wanted to do a deep dive on the homebuilding sector trading data. He’d amassed enough information and wanted to decide if it warranted raising to the level of a potential enforcement action. He stood two cups of black coffee from the kitchenette on his desk next to the MarketWatch monitor, settling in. This early and the coffee already smelled like burned tar.
After about an hour he printed just two summary pages that told him enough. Yes. Unmistakable: a group of market players had amassed a huge trading position in six homebuilders, then unwound it over the last few days. He didn’t need to see the correlation coefficients versus previous insider trading cases to convince him he was onto something.
He downed the last of his second cup of coffee, then reached into his bottom desk drawer for another handful of pistachios. He dialed Mike Dolan, his friend at NSA.
“I haven’t been able to put a lot of resources on this. Favor, you remember,” Dolan said. “So I put a new guy on it. He’s a sharp young fellow and I trust him.”
Croonquist heard it like Dolan was trying to let him down easy, wasn’t going to come through. “And?”
“Nothing worthwhile on the phones, but a lot of back-and-forth in emails between Walker, GCG and some other institutions on the Continent. A few other places, too.”
“Yes,” Croonquist said under his breath. He rolled a few pistachios around in his palm, waiting. Come on, out with it.
“A boatload of orders and confirmations for trades.” Dolan paused again, like he was reviewing the data. “They used code names. The pattern is outbound emails from Walker to GCG, then outbound from GCG to the others.”
“Any of the others include firms in the Caymans, London, Switzerland, the Netherlands Antilles?”
“Yeah. And a couple in the U.S. Shaw Securities and Beldenfirst.”
Croonquist didn’t say anything for a moment. He was wondering how far he could push Dolan, see if he could get him to broaden the monitoring.
“You still there?” Dolan said.
“Yeah…listen, I was just thinking,” Croonquist said, cringing inside, afraid of the answer. “I was wondering if you could maybe keep an eye on GCG’s lines inside the States as well. Maybe monitor their New York office.”
“Get real. I’d probably be screwed if anybody found out what I’m doing already. Unless you can convince me it’s got something to do with national security.”
“What would it take to do that?”
“You’d need to convince me.” He sounded like he meant it. Croonquist let that idea flutter around in his head for a moment, then let it go. It amounted to domestic wiretapping, and Croonquist knew what it took to get that. “Okay. Thanks, Mike. I’ll talk to my techies about getting the data transferred over to our Cray.”
The data would give MarketWatch something to work with. He was sure the NSA’s data would be a dead match with his own. The code names would turn out to be the six homebuilders. Once he had the data download from the NSA, it wouldn’t take more than a few hours of numbers crunching to confirm that. That meant he’d have trading patterns for Walker, GCG and the other institutions. And specific email addresses for those directing the trading. Probably enough to get authorization for wiretaps.
The next step would be to understand what the hell these guys were doing. They’d purchased various strike prices of put options in the homebuilders as well as bought all the stocks. Croonquist had an idea what that meant, but he knew somebody who could tell him with certainty. He picked up the phone.
New York City. Richard tried to keep a low profile sitting in the office of Fred Wall, Walker’s Head of Equity Capital Markets. The stock markets had just closed on the last day of Southwest Homes’ road show in New York, and he sat among Walker’s Pricing Committee members, ready to price the deal in a few minutes. The Pricing Committee members would figure out the price at which Walker & Company would buy 100% of Milner’s Southwest Homes shares from him, then resell them to the public when the markets opened in the morning. Man, over a billion dollars, Richard thought.
The informality in Wall’s office impressed him. The Pricing Committee members were scattered around the room in various plush sofas and 19th-century chairs, a bunch of senior guys lounging, staying loose like boxers before a prizefight. Jack Grass and Mickey Steinberg were there from Corporate Finance as the bankers who originated the client relationship and the deal. Wall, who reported to John Morris, head of Sales and Trading, ran the capital markets trading division that would sell and trade Southwest’s stock. Brian Smith was the syndicate manager, who kept the book of institutional client orders for shares of Southwest’s stock at various prices. These were the steely-eyed guys who built and ran Walker. Richard told himself it didn’t get any better: sitting among the power elite of Wall Street as they plied their craft.
Jeannie Peters posed with her hands in her blue suit pockets and joked with Jack Grass like they’d also attended George Cole’s and Howard Blaine’s fraternity.
Richard was the only one sitting by himself, not chatting or horsing around, the new kid.
He could distinguish the bankers from the traders by how they dressed, as if they wore the uniforms of different teams. Jack’s suit was European cut with pointed lapels; Steinberg’s the opposite extreme, classic Brooks Brothers in navy pinstripes. They both wore brightly patterned Hermes ties, Jack’s over a bold English striped shirt, Mickey’s over starched white. The traders wore traditional solid white, blue or pink button-down oxfords, their ties slid down and their collars open at the neck.
Finally, George Cole arrived, late.
Cole signaled Richard to hand out his brochures of comparable figures and other pricing information. He gave one to each of the officers, avoiding Jeannie’s eyes, feeling self-satisfied to be momentarily in the limelight and anticipating the action. Jack and Mickey exchanged a look, and Mickey got up and left the room.
Richard reflected on his Capital Markets class at Michigan, eager. He’d learned about the sophisticated alchemy of how an investment banker priced a deal; now he’d see it from the inside. Well, this is it. Now I’ll see what it’s really all about.
Wall asked, “How the hell can you price a deal with such inconsistent EBITDA and net earnings?”
Jeannie opened her mouth to say something and Cole talked over her, said, “It’s being priced off growth and potential.” Richard felt a swell of victory at seeing Jeannie muzzled.
Jack said, “EBITDA Schmebitda, look at…”
Smith, the syndicate head, cut in, “Fuck all the numbers mumbo jumbo, the order book’s at $14.50 per share if you wanna sell the deal out. If we price it any higher we don’t have enough buyers. We get stuck owning a big chunk of the deal and we take a bath when the stock drops like a stone once it starts trading on the exchanges, ‘cause we overpriced it.”
Jack said, “$14.50? $14.50, Jeez.”
Smith said, “Cut the shit, you know the order book as well as I do. You’ve been all over my guys checking it all week.”
About this time Richard started thinking this wasn’t at all how he imagined it would be.
Jack said, “Okay, how’s the book at $15.00? Milner’s gonna be pissed if we price it too far below $16.00.”
Smith said, “If we try $15.00 we’ll probably wind up owning 5 to 10% of the deal.”
Jack said, “That’s a chance I’ll take.”
Morris sat up like he’d been poked in the back and said, “Not on my divisional P&L and balance sheet. You guys in Corporate Finance carry it on yours.”
Wall said, “Yeah, in your dreams, Jack, that’s 50 to 100 million bucks. We aren’t taking a potential hit like that.”
Jack curled his lip at them both and said, “We’re making, say, $75 million in fees, we can’t afford to risk a little of it to keep the client happy? Maybe Milner takes his next deal to Morgan Stanley.”
Nobody said anything for about 30 seconds, Richard thinking, So much for Capital Markets 105.
Smith said, “I think we can get it done at $14.75, but I can’t guarantee it’ll stick at any higher price than that.”
