Following The Money Some 680 men, women, techies, and, yes, schools got pre-IPO shares of Internet highflier ICG. Here's how they became insiders and what they did as the stock crashed.
By Andy Serwer Reporter Associates Julia Boorstin, Seema Bhardwaj, Jonah Freedman, Yuval Rosenberg

(FORTUNE Magazine) – It was the most highly publicized disappearance in U.S. history since Amelia Earhart's airplane vanished over the Pacific. Depending on how you measure it, some $3.5 trillion in stock market value evaporated as the tech bubble burst last year. One minute it was there, and then the next thing you knew, it was all gone.

That's the conventional wisdom, anyway, a view that you're reminded of daily by the media--and, of course, by the grim arrival of your brokerage statement. If you're lucky, you're able to remember that this is a metaphor rather than reality: The wealth didn't actually vanish, because it wasn't really there in the first place. Market value, after all, is a question of perception.

Try reminding yourself of that the next time your annoying old college roommate starts bragging to you that he sold out of at $100 a share. Indeed, that ex-roommate has become an archetype--good or evil, depending on whether you won or lost in the market--in this era of bruised feelings. And that raises a question that is often ignored in the endless tales of the Fall of the Market: Where did the money go?

Where did it go, indeed. Sure, there were plenty who got in on the Internet craze early and cashed out before reality checked in. (Just take a look at "America's 40 Richest Under 40" in this issue if you have any doubt. Even after the dot-com disaster, there are still plenty of centimillionaires to go around.) Many of these fortunate early investors, of course, had an edge that others did not: an inside connection, via friends, firms, founders, or families, to the hottest Web stocks. They were therefore able to secure pre-IPO shares--insider shares, to call them what they really are--at infinitesimal cost and were virtually guaranteed a profit no matter when they chose to sell. But that commonsense scenario only leads to more questions: How, when, and where did these individuals get their stock? In short, how did one of the greatest transfers of wealth this country has ever seen actually take place?

Until now, the specifics have been shrouded in mystery. These Internet insiders have been party to a frenzied buying and selling process to which few of us are privy--and where public disclosure isn't required. But recently we stumbled across an unusual case that gave us an incredible window into that world. Because of a regulatory quirk, hundreds and hundreds of investors in a company called ICG--Internet Capital Group--had to reveal their names and proposed stock sales in SEC documents. Incredibly, some 680 insiders, many magnitudes more than at most other Internet companies, from all walks of business life, had to divulge their positions in public filings. Naturally that piqued our interest. So we began to dig deeper, to explore who the insiders were and how they got their ICG shares. The more we dug, the more interesting the story became.

You remember Internet Capital Group, don't you? In one sense, it's a silly question. The company--known as the king of the Internet B2B incubators--has not gone out of business, as so many other Internet companies have. But it is a far cry from what it was two years ago, when it was perched on top of the world. Indeed, so fast did ICG's fortunes fall, and so distant are we now from the Age of Irrational Exuberance, that the company seems virtually a relic. Of course, to ICG CEO Walter Buckley, co-founder Ken Fox, and the dozens of others who still work at the Wayne, Pa., company, ICG is very much in the here and now. These folks are all still doggedly trying to fulfill the promise of their once-shining business plan. And who knows? Someday ICG may shimmer yet again.

To many of the ICG insiders, though, the question of whether the company lives or dies is irrelevant--at least from the point of view of their net worth. Most of those who got pre-IPO shares have long since sold them (or a sizable chunk of them)--and the earlier they bailed out, the more they made. In some cases, as you'll see in the accompanying boxes, true fortunes were made from that one stock; in other cases paper windfalls blew away because investors held on as the stock plunged from its peak of $212 to its current 70-cent share price. (We should point out, though, that most of the company's actual officers and directors have sold very little of their stock.)

The first thing that hits you about the list of ICG insiders is what an amazing cross section of American business--indeed of American society--it represents. The list includes giant corporations like GE, IBM, and AIG, schools from Dartmouth College to suburban Philadelphia's Baldwin School, nonprofits such as the Pennsylvania Academy of the Fine Arts and the United Way, the white-shoe law firm Davis Polk & Wardwell, and business luminaries like Harold "Red" Poling, former CEO of Ford, and Internet guru Esther Dyson. Plus scores and scores of others who just happened to know someone at ICG or knew someone who knew someone and got in on the company's friends-and-family list of pre-IPO allocations. It's a web of interconnections of the highest magnitude.

To go beyond the basic SEC filings, to put a face on those thousands of forms--and to understand how the interconnections worked--we decided to try to get in touch with every single one of those 680 insiders and ask all of them their stories. Over a period of several months we made phone calls, sent e-mails and faxes, and wrote letters--hundreds and hundreds of them. Many insiders declined to speak with us, but scores did. Their stories are sometimes happy and sometimes sad--and often fascinating, as you'll see in the accompanying articles. Collectively, what emerges is the tale of a community whose common bond is a stock that soared to the moon and then crashed back to earth.

Before we get to that, though, let's take a minute to revisit Internet Capital Group. ICG used to be a poster-child Internet company; at its high point in December 1999 it had a mammoth market cap of some $60 billion, behind only AOL and Yahoo as an Internet stock--and bigger than such old-economy stalwarts as GM or Gillette. The company was founded in 1995 by Buckley and Fox, two smart young guys who were working at Safeguard Scientifics, a long-standing technology incubator in Wayne run by Pete Musser (see "Pete Musser: Seduced," at

In the mid-1990s, B2B was a fresh, exciting idea--indeed, says Buckley today, the term B2B had yet to be invented. Buckley and Fox wanted to apply the incubator concept to B2B and create and invest in a raft of business-to-business Internet companies. But instead of pursuing that dream inside Safeguard, the two men persuaded Musser to let them strike out on their own. As at other incubators, ICG management would be actively involved in the operations of its hatchling companies, which would reap additional benefits from doing business with one another.

In fact, what ICG was attempting to create is what Musser had successfully pulled together at Safeguard Scientifics, a sort of eastern Pennsylvanian keiretsu. The Japanese term, which refers to a network of intertwined companies, is most often applied in the U.S. to Silicon Valley networks, particularly to the one developed by venture capital firm Kleiner Perkins. But the keiretsu Musser and then Buckley and Fox wove was pretty significant too. After all, Safeguard's founder had backed or helped form companies like Novell, Comcast, and QVC. And now ICG itself.

Buckley, actually Walter White Buckley III, comes from a prominent local family steeped in the money-management business. His grandfather ran Buckley Brothers, and his father headed Buckley & Meuthing. Buckley attended the high-end Episcopal Academy in Philadelphia before going on to the University of North Carolina. Ken Fox's father, Robert Fox, is a longtime business associate of Musser's. The younger Fox graduated with a major in economics from Penn State before doing a stint at Goldman Sachs. It was there that Fox's career hit a bit of a snag. Goldman confirms that Fox left the blue-chip firm a mere two months after he'd joined it. (Fox was unavailable to comment on the reason for the hasty departure.) Rebounding quickly, Fox hooked up with Safeguard, where his father was a board member. He was named head of West Coast operations.

Raising money for ICG wasn't a problem for Buckley and Fox. Talk about being in the right place at the right time! They were in on the ground floor, and the hotter the Internet sector got, the easier it was to rake in more cash. "Initially [in 1995] we were looking to raise $20 million," says Buckley. "We asked Pete Musser for $5 million from Safeguard. He wanted to put in $15 million." In May 1996, ICG closed out its first round of funding at $40 million--more than twice what it had hoped for. In addition to the two founders and Safeguard, investors included Comcast, Compaq, BancBoston Ventures, and a dozen or so individuals. That group constitutes ICG's first group of insiders.

Significantly, the founders decided to set the company up not as a traditional corporation but as a limited-liability corporation (LLC). That structure, which Buckley says gave his burgeoning company more flexibility, would allow it to distribute income to shareholders without its being taxed twice. Though the founders may not have known it at the time, the decision to form an LLC would have consequences with regard to disclosure down the road--and ultimately give us this extraordinary snapshot of the company's early investors.

In July 1998, ICG raised a second, $70 million round of financing. Most of the first-rounders came back for more, while new investors, like Technology Leaders (a local venture outfit closely tied to Safeguard) and GE Capital, which anted up $7 million, put in the balance. ICG now began to generate a revenue stream as its companies "got traction" (remember that phrase?) and as ICG sold some companies. A fall 1998 IPO was eyed, but the Russian economic crisis put the kibosh on that. "By February 1999 we decided to go ahead with an IPO," recalls Buckley. At that point, ICG converted from an LLC to a more traditional C corporation--an action with consequences we'll get to in a moment.

Still, ICG wasn't yet done with the private capital markets. In May 1999 the company floated a $90 million convertible-bond issue. More money from the old investors. Another group of new investors. Then in August came the Merrill Lynch-led IPO (as well as a 7.5-million-share private placement with IBM). With an offering price of $12 a share, ICG sold 30.6 million. It wound up with more than $200 million in its coffers.

Because it had converted from an LLC to the more common C corporation just six months before, it also wound up with 680 insiders, who were required by SEC rules to disclose their stock. Why? It's a little complicated, so bear with us. Under the Securities Act of 1933, investors who buy pre-IPO shares within one year of the IPO and want to unload them must file something called Form 144 with the SEC. When ICG changed its corporate structure, the insiders' one-year clock was reset. According to SEC rules, at the company's IPO all its early shareholders had owned the stock for less than a year. That meant that hundreds of investors who ordinarily wouldn't have to disclose their holdings--even those who owned their stock through private equity funds or partnerships--would have to bare their souls to the SEC, and thus to the rest of us.

The fall of 1999 was ICG's glory season. ICG's share price (its ticker is ICGE) doubled in its first two trading days. The stock hit $40 (split adjusted) on Sept. 1. Broke $50 in October. Then $90 in November. Finally, over ten unbelievable days in December, the stock ran up 127 points to hit $212! This even as the company was selling millions more shares (and raising more than $1 billion) in a secondary offering.

In truth, though, dark clouds were already gathering over the stock that winter. The company's one-year holding period for its pre-IPO investors--and the six-month lockup period that tied the hands of insiders who bought the stock in the IPO--were both set to expire in February 2000. Buckley and Fox braced for the worst.

By Feb. 1 the stock had already dropped nearly 100 points. No big surprise there. Even the true believers knew that $200 was out of this world. But the frigid month brought waves and waves of insider selling, as the insiders bailed out. Members of the Quick family of discount brokerage Quick & Reilly filed to sell 300,000 shares for $35.3 million. BancBoston Investments registered to sell nearly 500,000 shares for an estimated $56.7 million. Roger S. Penske Jr., son of the racecar industry legend, filed to sell 15,000 shares--for a $1.8 million bonanza. In all, ICG insiders registered to sell more than $1 billion of stock when the window first opened.

Miraculously, by the end of February the stock had fallen only to $106, and it would soon climb back to $144. Why no catastrophe? Because the market was still infatuated with the Internet and tech. Which is a nice way of saying that retail investors were buying up the shares the insiders were selling.

It did finally collapse, of course. Over the next couple of months, as the tech balloon sprung a leak, support for ICG disappeared. Even more ICG shares were coming unlocked--and were being unloaded by the insiders. By April 2000, ICG had dropped to around $40: Giant GE Capital Corp. readied to bail out, to the tune of nearly $38 million. (In all, GE Capital would file to sell more than $181 million worth of shares.) Averell H. Mortimer, an asset manager and a grandson of Averell Harriman, hit the exits too, for more than $800,000. By June the stock was hovering in the 30s. Robertson Stephens founder Sandy Robertson filed to sell 41,666 shares that month, which would have produced a $1.5 million windfall. In October Daniel Rimer, a former Internet analyst with Hambrecht & Quist, filed to sell 2,500 of his shares, then worth less than $32,000. Not a big payday. So perhaps it isn't even worth mentioning that in October 1999, H&Q initiated coverage on the stock with a buy. The report, of which Rimer was a co-author, called it "a one-of-a-kind Internet holding company." (Oops. We mentioned it.)

By November 2000, ICG had fallen to $10. Down, down, down, to single digits this spring. Then to $1. And now, most ominously, the stock dropped below a buck, putting the company in jeopardy of being delisted. Even though ICG still has $300 million in the bank and has pared its portfolio and slashed expenses, it's not a stock anyone is eager to buy. Not anymore.

All of which brings us back to the lucky sellers--those 680 ICG insiders who are at the heart of this tale. As with so many things in life, success in the ICG sweepstakes had much to do with whom the investors knew. That, and darn good timing. Perhaps the best example comes from Comcast.

If you'll recall, the big Philadelphia-based cable company was also an early ICG insider. How did that happen? We asked the company.

It turns out that it happened because Comcast had a long-standing relationship with Pete Musser, who was instrumental in getting the company into the cable business in the first place. Musser sold Comcast its very first cable franchise (it was in Tupelo, Miss.) back in 1963. In the 1980s, Musser teamed up with Comcast on another project: QVC. That home-shopping network turned out to be a huge hit for the cable giant. "So when Pete called again about an investment, we listened," says Julian A. Brodsky, Comcast's vice chairman. Comcast put around $23 million in ICG. "At one point our stake was worth $3.5 billion. We only sold once. It was a $400 million piece." You mean $400 million just went into Comcast's treasury? we asked. "That's right: real money--you know, little green pieces of paper," replies Brodsky. The company almost sold another $500 million slug, he adds. Almost? "Oh, don't even mention it," groans Brodsky. Today Comcast's remaining holdings are worth around 20 million bucks.

The fact that Comcast blew it and still ended up with 400 million little green pieces of paper is not exactly a comforting thought for those who saw their portfolios evaporate over the past year. But it does help explain the case of the missing trillions.

REPORTER ASSOCIATES Julia Boorstin, Seema Bhardwaj, Jonah Freedman, Yuval Rosenberg