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Report Criticizes Goldman's IPO Access

Oct 3, 2002 | San Francisco Chronicle

Goldman Sachs routinely gave hot IPO allocations to top executives of companies it was courting for corporate finance business, including EBay Chief Executive Officer Meg Whitman and other top executives of her firm, and Yahoo co-founder Jerry Yang, according to the findings of a congressional panel released late Wednesday.

The House Financial Services Committee found that many of those executives quickly sold their shares in the initial public offerings for large, short- term profit while bearing little risk. The shares ultimately ended up in the hands of small investors, who were unable to get first-day access to hot IPOs but were more likely to be left with losses when those stocks crashed, the committee found.

The committee is examining the relationships between investment bankers, research analysts and corporate executives with the intent of proposing legislative reforms to curb the excesses of the 1990s bull market. The report noted that the practice of awarding hot IPOs to executives in return for underwriting business is not illegal, although it said it amounted to a form of corruption where "the system is rigged" against average investors.

Of 21 companies taken public by Goldman, every single one had an officer, director or executive who received preferential access to other IPOs lead- managed by Goldman, the committee said. Some executives and directors were each given access to hundreds of different allocations in Goldman-led IPOs. In some cases, they received single allocations of more than 20,000 shares.

A call to a Goldman spokeswoman was not returned late Wednesday. Representatives of EBay, based in San Jose, did not return repeated calls seeking comment.

Yahoo spokeswoman Joanna Stevens said: "Yahoo has not received a copy of the House Financial Services Committee report. Yahoo executives who received pre-IPO stock did so through private banking transactions through which Yahoo was not involved." She declined to elaborate.

Yang was the only executive from the Sunnyvale Web portal cited by the committee to have received preferential allocations. In addition to Whitman, EBay Chairman Pierre Omidyar and President Jeffrey Skoll also received IPO allocations, according to the committee.

The committee also examined after-market performance of companies taken public by Goldman and another investment bank, Credit Suisse First Boston, and found the results sorely lacking. Of the 21 companies taken public by Goldman that were under investigation, 16 of them are below their offering price by at least 89 percent, and 14 of those are under by at least 96 percent. Of 15 IPOs led by CSFB, all of them are down by at least 85 percent.

Several companies taken public by both investment banks have filed for bankruptcy.

"Despite due diligence obligations under the federal securities laws, many companies were clearly brought to market prematurely in an effort to generate investment banking fees," the committee concluded. "Most had insufficient assets and revenue to remain viable."

The findings are surprising because even as Merrill Lynch, Morgan Stanley and Salomon Smith Barney have come under fire for their analysts' recommendations of questionable companies, and Credit Suisse First Boston was penalized for taking kickbacks from investors for IPO allocations, Goldman Sachs has remained relatively unscathed.

Goldman Sachs continues to enjoy a reputation throughout the industry as the quality firm. It was the one of the most prolific underwriters of technology and Internet companies during the stock market explosion of the late 1990s.

Among other executives whose companies were investment banking clients of Goldman and who received IPO shares were Kenneth Lay, Herbert Winokur Jr. and Robert Belfer, all formerly of Enron; L. Dennis Kozlowski and Mark Swartz of Tyco; and Stiles Kellet and John Sidgmore of WorldCom.

Other recipients who quickly flipped their shares, according to the committee, included John Legere, Barry Porter, Abbott Brown and Stephen Green of the telecommunications firm Global Crossing, which is incorporated offshore but primarily operates from Beverly Hills; Martin Peretz of; Edward Lenk of EToys; and Stephen Valenzuela of

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