Regulations Are Seen as Feeble Response to Greed

In the heyday of the technology boom, any analyst, venture capitalist, investment banker or entrepreneur who didn’t become filthy rich just wasn’t trying. Greed wasn’t merely good; it was the fuel that powered the system.

Last week’s agreement between regulators and 10 top Wall Street firms aims to stamp out the things that greed inspired: conflicts of interest, sweetheart transactions, chicanery, lying and fraud.

Good luck, says a cross section of players and critics in Silicon Valley -- the place where the dot-com boom was born, nurtured and quickly exploited by natives and Wall Streeters alike.

Human nature is not easily re-engineered, these folks say, and well-meaning but toothless measures aren’t going to help much.

“It’s so sad that people think this is a remedy,” said Ruthann Quindlen, a venture capitalist with Institutional Venture Partners in Menlo Park, Calif. “It changes nothing.”

Said Gary Lutin, a New York investment banker who runs forums on dot-com excess: “The solutions seem artificial. It’s sort of like needing water at the top of a hill, so you pass a law saying water should run uphill.”

The exact nature of the new regulations, which are accompanied by $900 million in fines, remains to be detailed. But they will include forcing the brokerage firms to spend $450 million to hire independent researchers, presumably resulting in the objectivity that Wall Street pretended was there all along.

Also in the offing: a ban on having a firm’s research analysts accompany its investment bankers on pitches, which is supposed to make sure that stock recommendations are untainted by the quest for banking fees.

A third regulation would prevent brokerage firms from giving shares in hot initial public offerings to their big clients, a practice known as spinning.

IPOs occurred at the rate of about two a week in Silicon Valley during the second half of 1999 and the first six months of 2000, providing enormous fees to the bankers, paper riches to the entrepreneurs and, through spinning, quick fortunes to Valley executives who already were vastly wealthy.

“They were bribes,” said Quindlen bluntly, and very lucrative ones when a hot stock could double, triple or quadruple on its first day.

Last week Margaret Whitman, chief executive of San Jose-based EBay Inc., resigned from the board of Goldman Sachs Group. Two months ago it was revealed she had received shares in more than 100 Goldman IPOs. EBay is a Goldman client.

A spokesman said Whitman had done nothing wrong but was resigning to remove any appearance of a conflict of interest.

Other Goldman clients in Silicon Valley who have been beneficiaries of spinning, according to congressional investigators are EBay founder Pierre Omidyar and Yahoo Inc. founder Jerry Yang.

Spinning, as some critics have pointed out, already was prohibited under the “corporate opportunity” doctrine, which holds that an officer of a corporation can’t take personal deals without first offering them to his own company.

“The problem during the boom wasn’t the lack of rules,” said San Carlos, Calif., hedge fund manager Eric Von der Porten. “It was that no one enforced them. So why are new rules going to make a difference?”

The rule barring analysts and investment bankers from being together in the same room with IPO candidates was, according to those interviewed, at best naive and at worst nonsensical. Couldn’t the two simply collude on the phone, the analyst agreeing to hype so that the banker could win the business?

Granted, analysts’ docility has been revealed as a huge problem. As Merrill Lynch & Co. analyst Henry Blodget acknowledged at the height of the boom: “There’s certainly a tendency to give the company a benefit of the doubt” when your firm is the one that has taken it public.

Just how deep this tendency went in Blodget was revealed this year, when investigators released e-mails showing him touting Merrill-backed stocks he privately was describing as junk.

In January 2001, a Merrill Lynch financial consultant asked Blodget if he would recommend buying Excite@Home, the Redwood City, Calif., Internet portal and broadband company.

AT&T; Inc. probably would buy the company, Blodget wrote back, “but as a stand-alone business, it’s falling apart.” At the time, Blodget had “accu- mulate” ratings on the stock. Excite@Home later folded.

“If the same firm employs the analyst, the originating investment banker and the broker who allocates the shares of the IPO, they’re all going to have incentives” to act as a team, Lutin said. “You have to change the structure to change the incentives, and that’s not happening.”

As for independent analysis, the notion is “fanciful,” said Randy Komisar, a consulting professor at Stanford University and veteran entrepreneur. “I see a bunch of [Wall Street firms] paying blood money to get out of a sticky wicket. I’m not sure how much they’ll support independent analysis in the long run.”

If those with a reformist bent believe the reforms don’t go far enough, others in Silicon Valley are convinced they went too far.

Tim Draper, one of the best-known and most successful venture capitalists, wasn’t sure what the new rules were, but he decried their mere existence.

“This is an act of bureaucratic terrorism,” he said. “I think what happened was, there was some trouble at Enron, and somehow the bureaucracy decided every corporate group was at fault.”

The market, Draper added, “self-regulates, unless there is regulation.”

“This creeping regulatory environment just makes it tougher for the little guy to go out and create something new,” he said.

The discussion of proper punishments and wise laws comes against a backdrop of misery in the high-tech world.

The prospect of taking a company public in the current climate is so unlikely that the notion makes people in Silicon Valley giggle when it doesn’t make them want to throw themselves into the ocean. Only a handful of tech companies have completed IPOs this year.

“Everyone’s licking their wounds,” said Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. As long as investors still have at least a memory of the pain of the last three years, he said, that will do more than any new regulations to keep the market honest.

Meanwhile, the Valley is in low-key, penitential mode.

“We continue to keep our heads down,” said Nirav Tolia, chief executive of Epinions Inc.

The online consumer ratings service, based in Brisbane in the Bay Area, launched during the tech boom with tremendous publicity. It didn’t have a chance to go public before the crash, which might have helped it survive during the current lean times.

Like Draper, Tolia said he didn’t know much about the new regulations. But then they won’t be relevant to him for a long time.

“We’re thrilled to report that we’ve achieved profitability, but that doesn’t mean that the next thing we look for is an IPO,” he said. “What’s relevant is building a great business.”

For the moment, at least, reality has banished greed. And that’s more than the regulators ever could do.