Confessions of a Wall Street Analyst Part 13

By October of 2000, AT&T's shares were mired in a decline that had begun shortly after the announcement of the AT&T Wireless IPO back in 1999. On October 4, 2000, The Wall Street Journal The Wall Street Journal ran a story on the front page of its Money & Investing section about Jack's ill-timed upgrade of AT&T, hinting that it might hurt Salomon Smith Barney's banking business, which had hit a phenomenal $350 million in fees in 1999. It read, "everyone seemed to win-everyone, that is, except investors who heeded his call and bought AT&T stock." ran a story on the front page of its Money & Investing section about Jack's ill-timed upgrade of AT&T, hinting that it might hurt Salomon Smith Barney's banking business, which had hit a phenomenal $350 million in fees in 1999. It read, "everyone seemed to win-everyone, that is, except investors who heeded his call and bought AT&T stock."16 Incredibly, two days after the article appeared, Jack reversed himself again, downgrading AT&T shares to a "2," or Outperform. The downgrade shocked most of the media and Salomon Smith Barney's brokerage clients, but it was old news for many of the professionals. Back in May, when Jack rated AT&T shares a Buy, or "1," and just after the AT&T Wireless IPO was completed with a $63 million payoff to Jack's firm, I received an e-mail from a client who worked for a hedge fund. "Fyi, Jack is p.i.s.sing all over AT&T," he wrote, suggesting that Jack's private comments to some inst.i.tutional investors were far more bearish than his written reports, which Salomon Smith Barney's brokers and individual investors relied upon.

Jack's tactics were finally attracting some negative attention. I was happy about it, and I wasn't the only one. Just after the Journal Journal article came out, I got an e-mail from Frank Quattrone. Ever the compet.i.tor, he saw the negative articles about Jack as a major opportunity. article came out, I got an e-mail from Frank Quattrone. Ever the compet.i.tor, he saw the negative articles about Jack as a major opportunity.

"Hey," he wrote, "Grubby-man is getting drubbed on the att round trip. Major oppty for you to crush him for good. Planning any major marketing/advertising events?"

Unlike Frank, I wasn't much of a self-promoter, so I simply responded, "Any ideas?" and the discussion ended there. I was glad I wasn't the only one noticing Jack's diminished status.

It was at about this time that AT&T's Armstrong decided to throw in the towel on his cosmic strategy of integrating voice, video, and wireless into one bundle of services. Instead, he decided to break up AT&T all over again by dividing the company into three completely separate companies-AT&T Long Distance, AT&T Wireless, and AT&T Broadband (cable TV and modern services). Unbeknownst to me, CSFB and Goldman bankers had been brought in to plan the restructuring. On October 23, I was called over the Wall, along with Goldman's telecom a.n.a.lyst, Frank Governali, to hear a preview of what Mike and his CFO, Chuck Noski, would say the next day at a hastily arranged a.n.a.lyst meeting.

We met secretly in AT&T's virtually uninhabited downtown Manhattan offices at the foot of Sixth Avenue. Almost all of AT&T's executives worked out of the New Jersey headquarters, but the company had kept the building to use for New York meetings. They had draft slides ready to go and wasted no time getting down to business. I had had no advance briefing from Chris Lawrence, CSFB'S AT&T banker, or his team, so this was all brand-new to me.

I was amazed that Mike was giving up on integration. I asked why a few different ways, but he only said that the stock had been pounded and that the market wasn't giving credit to the company's long-run strategy. In effect, he was saying that the market's myopia was forcing him to abandon his grand transformation plan. He seemed exhausted more than frustrated. Yet by the next morning he would be back to his ebullient self, confident smile and John Wayne voice at the ready.

And then AT&T's CFO, Chuck Noski, told Goldman's Frank Governali and me what Mike Armstrong was planning to announce about earnings and revenues. It was horrendous. The compet.i.tive pressures from WorldCom, Sprint, several new startups, and, of course the Bells, were causing AT&T to lose share and cut prices at a far faster pace than expected. I was suffering along with the company, having recommended AT&T at Merrill almost two years earlier, at a post-split $52 per share. AT&T shares had fallen 48 percent since then and were now trading at $27.

With the exception of IDB back in 1994, upgrading AT&T had been my worst stock call ever, and things had only gotten steadily worse. But now, with me over the Wall and CSFB likely to be advising AT&T for the next year or two, I didn't think I should be issuing any opinions. CSFB's compliance officers agreed, so I was instantly restricted from commenting on AT&T and its shares. From October 23, 2000, I couldn't write or say a word about AT&T. As frustrating as this was, I was also relieved: my call had been a disaster and this, at least, stopped the bleeding.

The a.n.a.lyst meeting didn't go over well. AT&T shares fell another 13 percent. And the market was beginning to realize that the disease that was afflicting AT&T-brutal compet.i.tion for long distance services, the move to make long distance free for cellular calls, and the muscle of the Baby Bells-was beginning to give the other long distance companies more than a sniffle as well.

Except, that is, for good old Qwest. Exactly a week after AT&T's dour earnings announcement, Qwest held an all-day a.n.a.lyst meeting in Manhattan, at the Waldorf-Astoria Hotel. As we sat in the Grand Ballroom awaiting Joe Nacchio's talk, the mood was defiantly confident. It seemed the polar opposite of the morose tone of the AT&T meeting. Clearly, whatever one thought of Joe, he was doing something right. Qwest continued to thrive, reporting robust and on-target growth in revenues and operating cash flow.

Suddenly, the lights dimmed and the stage lit up. Out marched Joe, dressed in full Australian outback regalia and pith helmet, to the overdramatic sounds of the music from the hit TV show Survivor. Survivor. Arrayed around the stage were a series of burning torches, each one representing one of Qwest's compet.i.tors. There was a torch for AT&T, another for WorldCom, and one torch each for Sprint, Global Crossing, Verizon (the former Bell Atlantic), and several of the other Baby Bells. You can imagine what came next. Nacchio, completely in his element, traipsed merrily across the stage to each one of his rivals' torches and delivered a short monologue on what was wrong with each one of them. Then, with evident pleasure, he snuffed out each of their flames. Arrayed around the stage were a series of burning torches, each one representing one of Qwest's compet.i.tors. There was a torch for AT&T, another for WorldCom, and one torch each for Sprint, Global Crossing, Verizon (the former Bell Atlantic), and several of the other Baby Bells. You can imagine what came next. Nacchio, completely in his element, traipsed merrily across the stage to each one of his rivals' torches and delivered a short monologue on what was wrong with each one of them. Then, with evident pleasure, he snuffed out each of their flames.

"I don't know what's wrong with the other guys in the industry," he repeated over and over during the course of the meeting, "but Qwest is doing just fine." Yes, he acknowledged, the economy was soft in a few regions, but US West's regional economy was resilient and other growth sources, such as data, Internet services, and wireless services, were more than compensating. Then there was the stability of US West's local business, which was still more or less a monopoly. If there was to be only one Survivor, he a.s.sured all of us, it would be Qwest.

While the skit was silly, those of us still recommending Qwest's shares found the meeting somewhat of a relief. There were still some winners in this sector, and what seemed to be happening was that the day of reckoning for the inc.u.mbent long-distance companies that I had warned about five years earlier was upon us. Some companies were getting their lunches eaten; others were prospering. It wasn't a slowdown in overall demand as much as a Darwinian shakeout.

But that sense of relief didn't last long. Just as I was leaving the Qwest meeting, I got word that WorldCom was holding a surprise a.n.a.lyst meeting in New York the next day, November 1. I figured it was going to be bad news, and it was. I intentionally arrived early at the meeting, about 6:45 AM AM, to get the press release as soon as it came out at 7:00 AM AM. It announced that WorldCom was going to create two, yep, tracking stocks, one for services to businesses and one for services to consumers.

More significant, it also was reducing its growth projections due to "intense pricing pressures, unfavorable foreign exchange rates and the s.h.i.+ft of consumer voice to wireless technologies."17 Though the new targets were dismal, it sure looked as if Scott Sullivan and his team had done extremely detailed a.n.a.lyses of WorldCom's various lines of business. Though the new targets were dismal, it sure looked as if Scott Sullivan and his team had done extremely detailed a.n.a.lyses of WorldCom's various lines of business.

Wow, I thought, these are huge cuts. The water torture of the past three quarters had turned into a downpour. I knew this would be very bad for WorldCom's share price, and I knew I needed to tell CSFB's sales force as quickly as possible. But first I wanted to get a better understanding of what was happening. Bernie was not around yet, but I found Scott and asked a few questions about what was driving the bad news. He had some pretty logical answers that were consistent with Armstrong's answers a week earlier. When I asked about his new forecasts, he said he would not talk about them until Bernie made his opening remarks. Realizing that I wasn't going to get much more from him and that CSFB's morning meeting would be ending soon, I pulled out my BlackBerry and started to type up an e-mail to CSFB's sales force.

With its wireless e-mail capability, the BlackBerry had completely transformed my job: no more racing to beat my compet.i.tors to the phone banks, no more having to wait until a meeting was over to get my thoughts back to my team or the sales force. I decided to immediately downgrade WorldCom's shares for the second time this year, this time from Buy, or "2," to Hold, or "3." I also dramatically lowered my earnings estimates for 2001 to $1.10 per share, down 46 percent from my prior estimate of $2.02. A huge $2.7 billion dollars of annual profit had just disappeared.

At the meeting, even Bernie seemed humbled, a shadow of his former swaggering self. "We recognize we have let you down," he said, promising to do better. "When I was 16 years old, I was a six-foot-three, 130-pound kid trying out for the high school basketball team. I was one of six Anglo-Saxon kids among a Native American community. Our coach didn't speak English. I was competing for starting center against a kid the same height but 100 pounds heavier. The coach threw the ball out into the center of the court and said whoever comes up with the ball is the starter. I came up with it. We are going to come up with the ball too. We are going to right this effort as never before."

Later, he was a lot less sanguine. "People have a legitimate right to ask if I'm the right person to lead the company," he told reporters after the meeting.18 WorldCom's announcement was an unmitigated disaster for virtually everyone in the investment world. Lots of professional fund managers still owned the stock, which had already been suffering and was about to get crushed, and virtually all Wall Street a.n.a.lysts were still recommending it. The only thing that made the pain bearable for us was the fact that this business was all about comparative performance. So if we all got hosed, at least we were all in it together.

A day later, two other investment banks downgraded WorldCom shares: Merrill Lynch, with my former colleague Adam Quinton, and Wachovia Securities, both from "Buy, or "1," to Neutral, or "3." Salomon Smith Barney and J.P. Morgan were handling the tracking-stock deal, so I a.s.sumed they would not comment.

But I had forgotten once again about the SEC's No-Action Letter. Jack reiterated his Buy, or "1," rating, in a lengthy report approved by his compliance department, as did the a.n.a.lyst at JP Morgan. By this point, compliance lawyers could drive an oil tanker through the loopholes in the SEC regulations, with plenty of room left over for an investment bank and its a.n.a.lyst to do whatever they wanted. Thanks to the No-Action Letter, a.n.a.lysts knew they could write about virtually anything they pleased, conflict or no conflict, with no fear of getting in trouble. Arthur Levitt's sleepy SEC appeared to pay not a whit of attention.

What had at first seemed like a bit of softness for one company had mushroomed into a calamity for all of the long distance inc.u.mbents. On November 3, Sprint held an a.n.a.lyst meeting that was a virtual carbon copy of the others, except it didn't announce a tracking stock, because it already had one. I was of two minds as I tried to digest the news. On one hand, I was devastated to have missed the biggest and most bearish nine-day period ever for the inc.u.mbent long-distance companies. Dammit, I thought, if only I had stuck with that position that I had launched with a bang back in July of 1995 and never upgraded those stocks to Buys. I should have ignored all the data and Internet hoopla and stuck to my narrow argument that the voice long distance business was going to get creamed.

On the other hand, I felt a kind of guilty vindication. My overall theory that the Baby Bells were the best situated to compete in this market had been strengthened, not weakened, by what had just transpired. Now WorldCom, Sprint, and AT&T were too weak and too distracted to attack the local market, giving the Baby Bells still more power.

In our insular Wall Street world, I suddenly looked a lot better than a lot of my compet.i.tors. Clients began calling to congratulate me, citing both my relatively early downgrade of WorldCom and the fact that my argument of five years ago was beginning to bear fruit. Jack, they said, was no longer looking as savvy as he had just a few months earlier. An important s.h.i.+ft was happening, we all intuitively understood. What we didn't yet understand was exactly how seismic it would become, and how devastating the results would be.

9. Crash and Burn Crash and Burn

2001.

The victory couldn't help but feel hollow. When I came home and told Paula the news, she congratulated me, but it didn't take long for her to ask, "So what's going to keep you going now?" It was a good question. The twin towers were down, the markets were down, much of the telecom industry was down, the reputation of a.n.a.lysts was down, and even Jack Grubman was on the way down. Every part of my professional world was unraveling, from the companies I followed to the firms I worked for.

The Crash

MR. REINGOLD," the voice mail message began, "I saw your report today about WorldCom." I didn't know who he was, but his voice had an ominous tone.

"Mr. Reingold, you are making the stock go down with lies about the company. I know how you Wall Street firms work. You guys short the stock and then go out there with your negative reports and force the stock down." By now, he was starting to breathe heavily, growing more and more agitated. "I'm going to take you and your firm to court, Mr. Reingold," he screamed. "I am not going away. You guys and all the others like you will pay pay! See you in court!" He hung up.

The first time this man called me was in the middle of 2000, after my first downgrade of WorldCom's stock and after I had begun to regularly reduce my earnings estimates for the company. Every sell-side a.n.a.lyst on the Street got calls from such people on occasion, and as the stock market began to teeter and tumble, there were understandably many more of them. By October 2002, when the market hit its bottom, the Dow Jones industrial average had lost 38 percent from its high, while the NASDAQ composite index had tumbled a horrifying 78 percent. Some estimates put the total value of stock market losses at about $8 trillion.

Yet today, after a.n.a.lysts have been excoriated-and rightfully so-for remaining relentlessly sunny as the clouds on the Street began to build, there's a part of the story that is rarely understood. That's the unslakable thirst of investors-whether pros, individuals, or that new breed, day traders-for bullish commentary, as if such commentary could make "the value of these stocks...perpetually rise," in Jack Grubman's words of 1999. My irate caller's rant came from the misplaced belief that a.n.a.lysts had the magic wand to reverse a stock's decline, simply by saying it wasn't so. He saw us as all-powerful, when we turned out to be anything but. In a panic-driven market, no one person or group could halt an avalanche. The true believers couldn't, and wouldn't, accept this reality.

A few months later, in late 2000, the same man called again and left even more threatening messages, full of venom. I was unnerved, so I forwarded the message to CSFB's legal and security departments. The folks in security actually hired a private detective to find out more, and after a little bit of digging, they discovered that he was an attorney in a Boston suburb with a history of cla.s.s-action lawsuits against Wall Street. That made me relax a little bit. At least, he seemed to use legal means to fight his battles and wasn't, I figured, some wacko who was going to blow me away one morning as I walked into the office.

But what was most disturbing-and eye-opening-was that he seemed utterly convinced that we at CSFB were artificially forcing down WorldCom's shares. The great irony, of course, is that WorldCom's problems were only beginning. While he was apoplectic that WorldCom's stock had fallen from a high of $64 to $15, the company was essentially bankrupt already. I'm sure he now wishes I'd been more negative on the stock at the time, not less. I certainly wish I had.

There had been countless press stories romanticizing the stock market and the brilliant minds behind it, and now, as the indices began to sink into an unforgiving quicksand, the pendulum swung to the other extreme. First came the dot-com debacle. Pets.com was one of the first newly public American companies to go under, in November of 2000, with hundreds of others soon to follow. A bitterly funny Web site, f.u.c.kedcompany.com, sprang up to spread the latest gossip about each failed dot-com and the number of layoffs a.s.sociated with it. In a split second, the market psychology on these new companies switched from "anything is possible" to "nothing is real." There were still jokes, but the tone changed from giddy silliness to gallows humor.

I watched all this through the eyes of a bystander, or so I thought. As the dot-com meteorites quickly disappeared into a black hole, it still seemed relatively easy to believe that what was going on there there was a South Sea Trading Companystyle bubble bursting, while what was happening in telecom was simply a cla.s.sic shakeout. People were not going to stop talking on the phone, obviously. And businesses were not going to stop sending information and data from one place to another via the Internet either, though the traffic wasn't as much as prophesized. was a South Sea Trading Companystyle bubble bursting, while what was happening in telecom was simply a cla.s.sic shakeout. People were not going to stop talking on the phone, obviously. And businesses were not going to stop sending information and data from one place to another via the Internet either, though the traffic wasn't as much as prophesized.

Sure, the Telecom Act of 1996 was doing significant harm to the inc.u.mbent long-distance companies, and sure, the bull market had funneled too much cheap money to the startups, but the Baby Bells still seemed to be on solid ground and Qwest had the advantage of owning a real phone company in US West. Even Global Crossing's business came mostly from overseas, where compet.i.tion wasn't as intense.

What an incredible piece of self-delusion. No one had realized it, but our sector was headed for a collapse that would make the dot-com crash look like a fender bender.

As 2001 dawned, some disturbing events began to hit much closer to home. The first telecom group to lose favor was the startup local telephone companies that had sprung up to meet the new telecom needs of the dot-coms. Companies such as ICG, Winstar, Metromedia Fiber Network, McLeodUSA, and XO Communications, which provided local phone and data service in compet.i.tion with the Baby Bells, began to buckle under the weight of their enormous debt, which they had easily raised from investors who believed they would fill a ma.s.sive unmet need for communications services.

Mark Kastan and I both thought that the winners among them would be the ones that built real networks and were not dependent upon the Baby Bells to connect to customers. But it turned out that building local infrastructure-that last mile to the home-is extremely expensive and takes a very, very long time. And although the startup local carriers were more than flush with cash thanks to the generous stock and bond markets, the money came so easily that they wasted a lot of it on fancy headquarters and ma.s.sive advertising programs and neglected their buildouts.

Ultimately, the dot-com collapse had a domino effect on the local carriers: when the dot-coms' capital dried up, they cut back their expansion plans and canceled orders for communications lines. The Bells, with their healthier finances and well-diversified customer base, weren't affected nearly as much.

The local-carrier collapse hit Jack the hardest, because he continued to strongly recommend almost every one that did its banking with Salomon-which was most of them-even as the stocks began to tumble. The first to file for bankruptcy was ICG, in November 2000, followed, five months later, by Winstar Communications, a company that had been a top pick of Jack's and of Mark Kastan's. Although Mark was more selective in his recommendations than Jack, all of us were slow to see what poor compet.i.tors a lot of these companies were and how quickly the funding would dry up. But as the year went on, it was Jack's reputation that took more and more of a hit. He'd always claimed to be in the co-pilot's seat with these companies. So why didn't he know they were about to crash, his critics asked?

Yet as strange as it may sound given the speed with which the market fell apart, the whole thing was pretty anticlimactic. The year 2001, for me, was a lot like being stuck in a s.h.i.+p taking on water. There was no single event that told everyone that it was over. Instead, we experienced a slow-motion decline that at first seemed strange and later seemed somehow normal. The Dow had peaked in early 2000, but fallen and risen several times since then, creating a sense that this might still be a short-term correction rather than a major bear market. And the true believers of the Internet kept on talking. Although fewer people were listening, those believers provided a final lifeline for the investors who hadn't yet realized that a major chunk of their life savings might have disappeared.

With no real idea how long all of this would last, most of the Street a.n.a.lysts just dug in and stuck to their investment theses. For me, that meant I continued to talk up the Bells and Qwest and to talk down WorldCom, the company most exposed to the downward trends in long distance. I remained restricted on AT&T and couldn't talk or write about it. I think that my jubilation over the first part of my longtime arguments having come true-the inc.u.mbent long-distance companies were in big trouble-may have kept me from fully understanding just how all-encompa.s.sing the global glut of telecommunications services would be. I still believed that there would be survivors in this industry, and that one of them would be Global Crossing, which I was recommending with a Buy, or "2," rating.

For Jack, sticking to the program meant continuing to pound the table for his favorites-WorldCom, Global, Qwest, and virtually every local startup-and to steer investors away from the Baby Bells even though he now had Buy, or "1," ratings on SBC and Verizon, two of the three Baby Bells. The remarkable thing about Jack was that the worse things got, the louder he talked, as if he could make it so simply because he said so. It wasn't actually an unreasonable point of view, given that until now most people seemed to think he really did make the world turn.

The Show Must Go On The 2001 CSFB Global Telecom CEO Conference took place in March, as always, but the tone was decidedly less exultant than it had been the prior year. Many months earlier, we had decided to move from the Plaza to the Grand Hyatt to better accommodate the crowds, but they were long gone. The NASDAQ had dropped a shocking 59 percent in the past year alone, taking along with it most of the telecom startups. We had 25 percent fewer people than the year before, but it was still a good turnout considering the huge snowstorm that hit New York on the first day. There was a lot of talking going on, but not a whole lot of deal making. The telecom world was coming to terms with the fact that not everyone was going to be a winner-and that, in fact, many were going to be big, big losers.

In the meantime, we had a show to put on. We didn't exactly party like it was 1999, but we didn't go into mourning either. In fact, our budget for the conference had been b.u.mped up by almost 40 percent, to $2.3 million. Our attendees still expected a good show, and we obliged. We considered a lot of big names for our special entertainment, people like Sting and Seinfeld.

The going rate for these guys was as inflated as the stock of the executives they were performing for. Sting, for example, charged between $600,000 and $1.1 million, plus six first-cla.s.s and nine coach round-trip plane tickets, 14 hotel rooms, ground transportation, and production. Seinfeld required a $550,000 fee, along with private aircraft or two first-cla.s.s round-trip airfares, one hotel suite, and one single room. Not only would these guys bust my budget, they just seemed too ostentatious given what was happening in the markets.

We ultimately chose Harry Connick, Jr., at a "bargain" cost of $375,000 plus two first-cla.s.s and 18 coach-cla.s.s round-trip airfares, two suites, and 18 rooms, along with ground transportation and production costs. I thought he summed up the mood I was striving for-serious and cla.s.sy. Instead of MP3 players, we gave out Motorola walkie-talkies. It was still absurd-just not quite as absurd as it had been the year before.

We had to walk an odd tightrope in this image-is-everything environment. To come off as cheap would imply that CSFB was suffering, and my bosses didn't want to project that. On the other hand, too much bling would mean we were oblivious to what was going on in the world and in the market, and that, too, would come off poorly. Our marquee speakers were Ivan Seidenberg of Verizon, Qwest's Joe Nacchio, and Duane Ackerman, CEO of BellSouth. AT&T, WorldCom, and Sprint executives were nowhere to be found. The idea of being pelted with questions from 1,000 angry investors probably wasn't that appealing to them.

In contrast, Global's president, David Walsh, subst.i.tuting for CEO Tom Casey, and Joe Nacchio were just as ebullient as could be. Joe exulted over the strong demand Qwest had seen in January, while Walsh confirmed the first quarter's positive outlook.

Perhaps because I was no longer recommending his stock, or perhaps because his stock was in free fall (having plummeted from $41 to $16 over the last year), Bernie Ebbers didn't speak at this year's event. Yet WorldCom was unquestionably the main topic of discussion in the hallways, as it had been everywhere I'd gone for the past few months. On January 22, 2001, Fortune Fortune published a piece, "Can Bernie Bounce Back?" that described him as down but not out and suggested that the company might make a good takeover candidate. published a piece, "Can Bernie Bounce Back?" that described him as down but not out and suggested that the company might make a good takeover candidate.1 I didn't know if anyone was truly thinking about buying WorldCom, but I thought it would be an incredibly stupid move to do so. My January report had reiterated my Hold rating, with the stock at $22.75, and said: "We remain on the sidelines on WCOM."

By the time of the conference, however, takeover rumors involving WorldCom were rife, particularly one that suggested that SBC might buy WorldCom. A reporter from Bloomberg News later that day asked me if I thought Bernie would sell the company for $35 a share, even though he supposedly had been looking for $50.

"In a New York minute," I said offhandedly.

"Who could afford WorldCom?" he asked.

"That's the problem," I responded, explaining that a buyer faced a slumping long-distance business, demoralized employees, and a long regulatory review.2 If that was Bernie's way out of the fix he was in, he was in big trouble. If that was Bernie's way out of the fix he was in, he was in big trouble.

Global's Insider Game It should be obvious by now just how unevenly information travels on Wall Street. Of course, the individual investor gets the least information and gets it last. But even within my world, the playing field is not level for inst.i.tutional investors that aren't as big or as powerful or don't have as many votes in the I.I. I.I. survey as others, or for those who simply are not able to attend a particular small-group meeting. There are the official rules and then there is the way things really are. survey as others, or for those who simply are not able to attend a particular small-group meeting. There are the official rules and then there is the way things really are.

A perfect example took place on June 14, 2001, when I sponsored a private meeting with Global Crossing executives for a small group of seventeen carefully selected clients. As it turned out, a lot of hedge fund guys came to this particular meeting, from such big names as SAC, Pequot, Galleon, and Chilton. Some of them were short Global stock and were loaded for bear, hoping to hear some bad news that would drive the stock down. They wouldn't be disappointed.

The meeting took place at 88 Pine Street, Global Crossing's New York headquarters. It was a very modern s.p.a.ce, with lots of black and silver and a sleek new-economy feel to it. The schedule called for an executive from every major sales category of the company to make an informal presentation and take questions from us. But as we got ready for the 2:00 PM PM meeting to start, I was surprised to see Global Crossing's fourth CEO in three years, Tom Casey, a former banker at Merrill and lawyer to telecom companies, stride into the room with Global's president, David Walsh, by his side. Tom hadn't been on the agenda. meeting to start, I was surprised to see Global Crossing's fourth CEO in three years, Tom Casey, a former banker at Merrill and lawyer to telecom companies, stride into the room with Global's president, David Walsh, by his side. Tom hadn't been on the agenda.

The turnover at the top of Global had been worrisome-the stock traded down every time one of the CEOs left-but at the same time, understandable: each of them was paid such an outrageous amount of money in salary and stock options (Bob Annunziata left with $16 million for 11 months of work) that no one was surprised when they headed off to the beach after a year or so.

Yet later it was learned that Tom Casey's predecessor, the previous CEO, Leo Hindery, convinced that Global Crossing's business was not as strong as everyone believed, had written a devastating memo to Chairman Gary Winnick at the time of his departure nine months earlier, although this wouldn't be discovered by investigators until the following year. Leo predicted the company would fail unless it made major strategic changes. "Like the resplendently colored salmon going up river to sp.a.w.n, at the end of our journey our niche too is going to die rather than live and prosper," he wrote. "...The stock market can be fooled, but not forever, and it is fundamentally insightful and always unforgiving of being mislead [sic]....Without looking like we're shaking our bootie all over the world, [we should] sell ourselves quickly to whichever of the six possible acquirers offers our shareholders the highest value."3 But the booty shaking apparently hadn't attracted anyone, so here was Casey, standing all alone, his booty still. He wanted to chat with the group before the sales presentations began, so I introduced him quickly and he got right down to business. Casey asked what he said was a "hypothetical" question: "What would you guys think," he said, "if we stopped selling IRUs and instead sold capacity only via shorter-term leases?"

IRUs, otherwise known as indefeasible rights of use, were long-term rights to use Global's fiber-optic network-its main a.s.set.*

Tom Casey's "hypothetical question" immediately raised eyebrows in the room. Most of my seventeen clients had their BlackBerries and, boy, did a lot of thumbs suddenly get a workout. Just about everyone in the room understood in a split second what I did-that Global must really be having problems selling IRUs-and this meant big trouble for the stock. Tom Casey hadn't said the company was definitely changing its policy, nor had he warned that its forecasts were in jeopardy, but his hypothetical question caused everyone to ask their own question, which was some variant of the following: why would he even consider voluntarily halting the IRU gravy train unless customers were jumping off it?

I immediately asked for more. How would they make this transition, and why would they consider it? Others asked Tom if he was seeing tougher price compet.i.tion or slower demand, and whether, if Global made this move, it would be a temporary or permanent decision. His answers didn't satisfy anybody. Everyone who worked for a hedge fund, and therefore was able to sell stock short, instantly sent a note back to their trading desks: "SHORT GX!" In the course of one hour, from 2:00 to 3:00 PM PM, Global Crossing's stock dropped 17 percent, from $10.50 to $8.66, on heavy volume, proving once again the insider's advantage the big guys had over the little guys. Other than those of us in Global Crossing's conference room, no one knew why the stock was falling-not individual investors, not inst.i.tutional investors, not even those watching CNBC and other financial news shows.

At 5:00 PM PM, Tom Casey and Global's IR director, Ken Simril, moved uptown to another private buy-sider meeting, this one a dinner hosted by Jack Grubman. I rushed back to the office and prepared a report with my team that would cut our forecasts for Global Crossing. It seemed obvious that the buying power was s.h.i.+fting to the customer and thus future revenues would be lower. I left at about 10:00 PM PM and Ido and Ehud stayed at the office to make changes to the final draft. By the time I got home an hour later, the report was ready to go. Ehud asked if he could run the report by Ken Simril, the IR guy, figuring we'd get more detailed feedback if Ken had to react to something concrete and in writing. I said fine. At around midnight, Ehud and Ido called back to say that Ken had awakened Global's CFO, Dan Cohrs, at the St. Regis Hotel and that he would soon be calling us to talk about it. and Ido and Ehud stayed at the office to make changes to the final draft. By the time I got home an hour later, the report was ready to go. Ehud asked if he could run the report by Ken Simril, the IR guy, figuring we'd get more detailed feedback if Ken had to react to something concrete and in writing. I said fine. At around midnight, Ehud and Ido called back to say that Ken had awakened Global's CFO, Dan Cohrs, at the St. Regis Hotel and that he would soon be calling us to talk about it.

As tired as I was, I was happy about this. Cohrs knew the forecasts cold and thus we'd at least get a sense of whether our numbers were lower or higher than theirs. Either way, we'd be smarter after the call. At about 1:00 AM AM, my home phone rang again. On the line were Ehud and Ido, a very sleepy and annoyed Dan Cohrs, and an equally sleepy but not-yet-annoyed me. The CFO didn't waste any time.

"Dan, do you have to publish this?" he asked in a raspy voice. "I don't see why you have to or why you would want to. It was a private meeting, Tom's comments weren't official, in fact they were hypothetical, and we are not changing our guidance at all. We said similar things at Jack's dinner and Jack had no problem. He will be reiterating his numbers tomorrow morning."

Well, hooray for him, I thought. Had Jack not realized what Tom Casey was saying, or Casey toned down his comments for the dinner, realizing how much they had scared the earlier audience? I had no idea, but I did know that I didn't appreciate Cohrs's attempt to goad me into backing off. Anyone who thought I was going to follow Grubman's lead was smoking some very strong stuff.

"I understand your points and I appreciate them," I said, as I had now learned to at least pretend to be listening before I delivered the news people didn't want to hear. "However, I already had some concerns about my forecasts that were amplified by the discussions today."

Cohrs cut me off. "But, Dan, this creates a big FD [Regulation Fair Disclosure] problem for me. It forces me to make a filing with the SEC tomorrow saying that we have changed our guidance." I didn't know if he meant this or not, but, if he did, he was admitting that the company had given material information to one group that it hadn't shared with everyone-exactly what Reg FD prohibited.

"Hold it right there," I said. "I don't know if you have changed guidance or not. But I do know that I'm more concerned about your revenue outlook, and I need to lower my forecasts as a result. These are my forecasts, my points of view, and my concerns. I'm not saying you lowered guidance. We are simply lowering our our forecasts. I apologize if this puts you in a corner, but I just have to do it." forecasts. I apologize if this puts you in a corner, but I just have to do it."

Cohrs, quite p.i.s.sed, signed off. It was now 1:30 AM AM and we were all exhausted. The next morning, Ehud spoke on my behalf at CSFB's morning meeting, informing the salespeople that we were lowering our forecast for Global's 2001 revenues by 8 percent. Our report was published a few minutes later. Cohrs opted not to make a filing with the SEC. and we were all exhausted. The next morning, Ehud spoke on my behalf at CSFB's morning meeting, informing the salespeople that we were lowering our forecast for Global's 2001 revenues by 8 percent. Our report was published a few minutes later. Cohrs opted not to make a filing with the SEC.

Also that morning, a report from Jack, t.i.tled "Global Crossing: True Feedback True Feedback [emphasis added] from Management Meeting" appeared. "Contrary to comments by a compet.i.tor," he wrote, referring to me, "GX management did not alter prev. published financial guidance.... GX did not say it was changing [its] business model to a leased vs IRU business. Pressure on stock overdone. Reiterate buy." [emphasis added] from Management Meeting" appeared. "Contrary to comments by a compet.i.tor," he wrote, referring to me, "GX management did not alter prev. published financial guidance.... GX did not say it was changing [its] business model to a leased vs IRU business. Pressure on stock overdone. Reiterate buy."

We were onto something, but I still didn't downgrade the stock from its Buy, or "2," rating, because Global was now at $8.66 a share-significantly below my new and lower target price of $14. I concluded it was simply too cheap to bail out now.

A few weeks later, I received a message from Gary Winnick, Global Crossing's chairman. I called back and his secretary hooked me into his cell phone, as he was en route to investment banker Herb Allen's exclusive annual powwow of business movers and shakers held every year in Sun Valley, a fact he wasted no time announcing. Although Gary's tone was polite, his words were biting.

"I heard you are predicting a revenue miss in the second quarter," he said. "I just want you to know that you will be proven wrong."

I suppose those were intended to be fighting words, a threat in the sense that I would be embarra.s.sed for lowering my forecasts. But, with a positive rating still on the stock, I was actually hoping he would be proven right. And, given that the quarter was already over, I figured he-if anyone-should know. Better to be wrong on the forecast but right on the stock, I figured.

Nacchio's Wrath Just around the time of Gary Winnick's phone call, The Wall Street Journal The Wall Street Journal ran a story, "Overbuilt Web: How the Fiber Barons Plunged the Nation into a Telecom Glut." ran a story, "Overbuilt Web: How the Fiber Barons Plunged the Nation into a Telecom Glut."4 It argued that the race to build out capacity had more to do with the dueling egos of Level 3's Jim Crowe and Qwest's Joe Nacchio than the need for more fiber. Still, Qwest came out as the winner in the piece, mainly because it was well-diversified with its owners.h.i.+p of US West. It was clear that the biggest losers were inc.u.mbent long-distance companies such as WorldCom and AT&T, which were in full meltdown. Despite the fiber glut, companies like Global and Qwest were still signing up corporate and government customers for high-speed data and Internet services and hitting their numbers. It argued that the race to build out capacity had more to do with the dueling egos of Level 3's Jim Crowe and Qwest's Joe Nacchio than the need for more fiber. Still, Qwest came out as the winner in the piece, mainly because it was well-diversified with its owners.h.i.+p of US West. It was clear that the biggest losers were inc.u.mbent long-distance companies such as WorldCom and AT&T, which were in full meltdown. Despite the fiber glut, companies like Global and Qwest were still signing up corporate and government customers for high-speed data and Internet services and hitting their numbers.

Not everyone, however, believed that. Simon Flannery, Morgan Stanley's fairly new telecom a.n.a.lyst, had also been recommending Qwest with an Outperform or "2" rating, Morgan Stanley's equivalent of CSFB's Buy. A serious Irishman with a decent reputation, I didn't know him too well, but had seen some of his reports and they were excellent. On June 20, 2001, he published a report, co-written with two other Morgan Stanley a.n.a.lysts, lowering his rating on Qwest to Hold based on a bunch of arcane accounting concerns.

I studied the report carefully and reviewed each of its arguments. While I believed there were some interesting technical points about the accounting, I also thought these items would not affect future revenues or cash flow, the two elements that most affected my Strong Buy rating. The report also questioned whether Qwest's current rate of revenue growth was sustainable, without showing any real evidence to the contrary. I concluded it was just Flannery's hunch. My a.n.a.lysis of Qwest's recent financial reports showed the opposite.

At a time when most a.n.a.lysts were still bullish on Qwest, Simon's report hit the Street with a bang. And good old Joe Nacchio, as you might imagine, was apoplectic-and determined to make this guy pay. Later that same day, Joe held a conference call to respond to Simon's report. I couldn't remember any other company ever holding a conference call specifically to refute an a.n.a.lyst's report. I thought it would be an interesting call, and I was right.

"I'd like people to make sure they're listening clearly," Joe said. "There are no accounting issues or improprieties in Qwest's financial reports. Let me repeat that. There are no accounting issues or improprieties in our reports. Innuendoes [sic] on our integrity are not going to be tolerated," Joe raged, "irregardless [sic] of who makes them, including what I used to think was a reputable, branded firm like Morgan Stanley. This report is laced with innuendoes that are unsupported and are a direct attack on our intelligence and our integrity. I'm extraordinarily disappointed with what I consider unprofessional and irresponsible behavior from a major investment bank."5 Joe didn't stop there. To an audience of over 1,000 fund managers and a.n.a.lysts, he said he had called Phil Purcell, Morgan Stanley's CEO, and reamed him out. Then he declared that Morgan Stanley would no longer be considered for Qwest's investment banking a.s.signments and cast aspersions on the firm's motivations.

"For a firm like Morgan Stanley to be taking this approach with us, while at the same time they have Strong Buys on companies that have large financings in front of them, would make me look twice," he shouted. Thereafter, Simon was banned from visiting the company or talking to its executives. He also was blocked from asking questions on Qwest's investor calls.6 I was hardly surprised to hear this, given what I'd experienced with Nacchio. But I couldn't believe how far he had gone. Intimidation in private was the norm for Joe, but to go public with it not only was outrageously unprofessional but also managed to unify the entire investment community against him. Though many of us disagreed with Simon's conclusions, we all supported his right to his opinion. One friend of mine on the buy-side, who owned lots of Qwest shares, even circulated a letter, to be sent to Nacchio, imploring him to let Wall Street a.n.a.lysts do their jobs. I gladly signed it.

I was torn about what this meant for the stock. On one hand, I had never been a fan of Joe's, and this act certainly seemed like that of a CEO who had lost control. On the other hand, I disagreed with Simon's conclusions. Qwest, now trading at $30, was so cheap that it would be silly for investors to sell out now. I felt that the stock had fallen too far on the news, and that investors would be wise to take advantage of this temporary dip to load up on the shares. It reminded me of the irrational arb spread between Qwest and US West share prices when I was skiing in Vail.

It's worth mentioning here that liking a stock and liking a company are not the same thing. There are very few stocks that are not worth buying at some some price. Investing is a relative game, and smart investors look for mispriced or misunderstood stocks. Often, the most underpriced stocks are those of companies or managements that have stumbled. Qwest seemed to fit the bill: it looked as if it had been beaten up more because of Joe's big mouth and some insignificant accounting issues than for fundamental business reasons. I felt that this would correct itself over time, as long as Qwest continued to grow its revenues and operating cash flows as it had for the last few quarters. price. Investing is a relative game, and smart investors look for mispriced or misunderstood stocks. Often, the most underpriced stocks are those of companies or managements that have stumbled. Qwest seemed to fit the bill: it looked as if it had been beaten up more because of Joe's big mouth and some insignificant accounting issues than for fundamental business reasons. I felt that this would correct itself over time, as long as Qwest continued to grow its revenues and operating cash flows as it had for the last few quarters.

Although the fiber glut was becoming more and more apparent, Qwest had something the Level 3s of the world didn't-a true blue, nuts-and-bolts local phone company in the form of US West. To me, a longtime fan of the Baby Bell stocks, this was a huge plus and a substantial hedge against the long distance market. So rather than downgrade the stock, I decided to hold firm. I reiterated my Strong Buy, or "1," rating and countered the Morgan Stanley arguments in a conference call that I hosted for buy-side clients. It would prove to be a horrible decision.

The a.n.a.lyst Plays the Villain Life as an a.n.a.lyst had always been busy, but suddenly our job seemed a lot more like that of Bill Murray in Groundhog Day Groundhog Day than anything else: hear bad news, absorb it, lower estimates or ratings, try to quickly interpret it for clients, wash, rinse, repeat. Gone were the deals and the road shows plugging IPOs for the most part, since falling stocks meant most companies had a terrible time raising capital. This meant a lot more time for research and a lot less traveling. It was the one benefit of the downturn. than anything else: hear bad news, absorb it, lower estimates or ratings, try to quickly interpret it for clients, wash, rinse, repeat. Gone were the deals and the road shows plugging IPOs for the most part, since falling stocks meant most companies had a terrible time raising capital. This meant a lot more time for research and a lot less traveling. It was the one benefit of the downturn.

Yet just when I should have been using my extra time to really dig into the numbers behind all the companies I covered, I simply slowed down. I don't know if I was burned-out or depressed or preoccupied by the carnage around me, but I didn't go the extra yard that might have helped me uncover the numerous frauds. The timing was perfect. I had a great staff with the skills and brains to do it, and a lighter schedule. I should have focused more on the IRU business, which might have led me to uncover the growing number of swaps that were being used to boost revenue numbers. I didn't.

As the market continued to tank, the press, formerly fawning lapdogs, turned into attack dogs. And what these dogs dug up put everyone in my world on the defensive. The media's story line went like this: every little guy got ripped off, while every big executive or Wall Street insider walked away, pockets bulging with ill-gotten gains. But it was not quite as simple as that. Greed is a very democratic emotion. There were some little guys who picked up their chips and walked away at the right time, just as there were others who bet everything on the pa.s.s line and came up c.r.a.ps. There were big shots who truly believed that their companies were changing the world, and others who used their insider connections and information to take advantage of a bubble.

No longer big swinging d.i.c.ks, geniuses, or industry power brokers, suddenly everyone on Wall Street bore the scent of scandal. The biggest fingers pointed at a.n.a.lysts, who had been lionized as "power brokers" on the way up and now were being made into buffoons on the way down. The guru days were clearly over. What had become celebrity was beginning to become notoriety, and even those of us who had tried to stay on the straight and narrow were beginning to be looked at with scorn. We were crooks, manipulators, swindlers, or-best case-incompetents who never saw it coming.

In some kind of weird karmic boomerang, the biggest winners in the bubble economy quickly became the biggest losers. First to fall had been the Internet a.n.a.lysts, the most famous of whom were Henry Blodget of Merrill Lynch and Mary Meeker of Morgan Stanley. In March of 2001, Henry Blodget's role as a.n.a.lyst-c.u.m-banker was highlighted in a series of articles in The Wall Street Journal, The Wall Street Journal, and subsequently an investor brought a suit against him, claiming Blodget had recommended stocks that he thought were dogs. Merrill would settle the suit a few months later for $400,000, unleas.h.i.+ng a tidal wave of similar lawsuits. In May 2001, and subsequently an investor brought a suit against him, claiming Blodget had recommended stocks that he thought were dogs. Merrill would settle the suit a few months later for $400,000, unleas.h.i.+ng a tidal wave of similar lawsuits. In May 2001, Fortune Fortune ran a cover story, "Can We Ever Trust Wall Street Again?" featuring a very unflattering, sinister-looking picture of Mary Meeker. ran a cover story, "Can We Ever Trust Wall Street Again?" featuring a very unflattering, sinister-looking picture of Mary Meeker.7 I didn't know either of them very well. But I thought the accusations were still far from hitting the bull's-eye. After all, Merrill hadn't really been all that successful in the technology banking sphere, and neither of these a.n.a.lysts seemed to have used their insider information and connections to vault themselves to power the way many thought Grubman had. I didn't know either of them very well. But I thought the accusations were still far from hitting the bull's-eye. After all, Merrill hadn't really been all that successful in the technology banking sphere, and neither of these a.n.a.lysts seemed to have used their insider information and connections to vault themselves to power the way many thought Grubman had.

But Jack quickly became the third Musketeer in this very public hanging. WorldCom's continuing disappointments weren't helping, nor were the seemingly monthly death knells of the startup carriers he'd recommended for so long. Most frustrating for many investors was Jack's refusal to admit he'd been wrong. The anger went beyond the press to his own clients and brokers, who suddenly chomped on the hand that had fed them. If he had such great inside connections to these companies, they wanted to know, how could he not have known that they were in trouble? I was sure that finally, Jack's dealings were on the verge of being exposed, and I looked forward to that moment.

Suddenly, the regulators and the politicians woke up from their decade-long hibernation with hearty appet.i.tes. The damage was already done, but that didn't stop anyone from sounding as if they'd suddenly discovered that the earth did, in fact, revolve around the sun. Led by Louisiana Republican Richard Baker, the House of Representatives announced it would hold hearings on the topic of conflicted research. Arthur Levitt, the chairman of the SEC, had resigned in early 2001. His temporary replacement, acting Chairwoman Laura Unger, announced in June an investigation into conflicts of interest on Wall Street, focusing particularly on a.n.a.lysts' own holdings of stocks they may have recommended. At the end of June, the SEC finally issued an alert to investors identifying what it called "key issues that could compromise the objectivity of the research."8 There were also rumors that the New York State attorney general, Eliot Spitzer, was launching his own investigation into conflicted research. There were also rumors that the New York State attorney general, Eliot Spitzer, was launching his own investigation into conflicted research.

In the meantime, the finger-pointing was beginning to affect senior executives at the banks as well. One of the first to take the fall was Allen Wheat, the CEO of CSFB. In December of 2000, The Wall Street Journal The Wall Street Journal had reported that the SEC and the U.S. Attorney's Office in Manhattan were investigating the way in which investment banks were doling out IPO shares. The allegations were that CSFB, and possibly other banks, were involved in a kind of kickback scheme, in which some inst.i.tutions and hedge funds would receive large allocations of shares in hot technology IPOs if they agreed to pay higher-than-normal commissions. had reported that the SEC and the U.S. Attorney's Office in Manhattan were investigating the way in which investment banks were doling out IPO shares. The allegations were that CSFB, and possibly other banks, were involved in a kind of kickback scheme, in which some inst.i.tutions and hedge funds would receive large allocations of shares in hot technology IPOs if they agreed to pay higher-than-normal commissions.