Correction to This Article
A Sept. 14 article that mentioned investment banker Frank Quattrone, and a Sept. 16 clarification, should have specified that the people who purchased shares in initial public offerings from Credit Suisse First Boston were technology executives who had brokerage accounts there; most were not Quattrone's friends, and none was a CSFB co-worker.
Clarification to This Article
A Sept. 14 article on Silicon Valley may have left the impression that associates of investment banker Frank Quattrone got the chance to buy shares in initial public offerings of stock at prices determined before the offerings. They were given the opportunity to buy shares at the offering price.

Silicon Valley's Golden Past Tarnished by Latest Probes

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By Carrie Johnson
Washington Post Staff Writer
Thursday, September 14, 2006

Silicon Valley has long been the stuff of dreams, a place where gawky entrepreneurs create billion-dollar companies in their garages, their innovations sometimes bending the rules but forever changing the way we listen to music or chat with friends.

But lately, it seems, the valley has shifted from a shiny beacon of capitalism's promise into a shadowy target for investigators.

Last week Securities and Exchange Commission officials told Congress that they were investigating 100 companies for possibly rigging their compensation systems to guarantee lucrative payments to executives and favored employees. That figure includes many technology firms whose volatile stock prices sweetened the incentive to engage in improprieties.

Even Hewlett-Packard Co., the standard bearer for ethics among Silicon Valley's home-grown technology community, is hustling to move forward after the resignation Monday of its chairman, Patricia C. Dunn, amid investigations by prosecutors and federal lawmakers over whether directors' phone records were illegally accessed. Prompted by concerns that a board member leaked information to the press, the HP debacle is shedding light on the valley's insular culture, where secrets are prized and key players have multiple and sometimes conflicting obligations.

No industry has been immune to executive greed or governance lapses in recent years. The era's most disastrous collapses, of Enron Corp. and WorldCom Inc., occurred far from Silicon Valley. But the same mind-set that inspired so many technology entrepreneurs probably contributed to a breakdown in sound business practices, regulators said.

"You have industries where their whole thought process is to think outside the box," said Charles D. Niemeier, a former top accountant in the SEC's enforcement division who now oversees the accounting industry. "That works really well -- except when it comes to compliance with the securities laws."

A generation ago, Silicon Valley was a backwater, thousands of miles from the nation's financial center on Wall Street and serviced by a few investment banks, law firms and private investors with enough cash to fuel start-up ventures. But the technology boom of the 1990s changed everything. It drew billions of dollars west and made millionaires of young inventors and salespeople, many of whom had virtually no experience running a business.

Regulators later uncovered financial improprieties from that period, including "round-trip" deals where technology firms entered into agreements with each other to give investors the appearance that they were winning customers and gaining traction in the market. What mattered at the time was not reality, but the illusion of success, which often triggered a rise in the stock price, Niemeier said.

This year, investigators have focused anew on the technology sector and the apparently common practice of backdating stock options. A popular method of attracting employees, options give workers the chance to buy stock at a set price and within a specific time frame. Employees profit from the difference between the share price at the time of the grant and the price on the day the stock is sold. In backdating cases, executives have selected award dates after the fact that marked low points in the company's stock price, increasing the likelihood of a windfall. Backdating violates the law if it is not properly disclosed to investors and tax authorities, prosecutors and securities regulators have said.

Cnet Networks Inc., VeriSign Inc. and Macrovision Corp. are among the Silicon Valley businesses that have announced that they received subpoenas from Kevin V. Ryan, the U.S. attorney for the Northern District of California, over their options practices, according to securities filings. Apple Computer Inc. also has disclosed irregularities in its option grants.

"I don't think greed has any special place in Silicon Valley," said Bill Burnham, a former investment analyst who founded Inductive Capital L.P. in Menlo Park, Calif. "There're greedy people everywhere. . . . I've seen a lot of people take very principled stands here where a lot of money is at stake."

Yet the latest round of investigations underscores how Silicon Valley's freewheeling culture is, sometimes painfully, making way for a more mature and formal system, where companies now public are required to abide by their obligations to investors, business and legal analysts said.


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© 2006 The Washington Post Company

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