The US investment bank Goldman Sachs today found itself embroiled in the spate of scandals rocking Wall Street.
A congressional committee accused the prestigious firm along with two others on Wall Street, of rewarding senior company executives with preferential allocations of new shares as a means of winning investment banking business. Those executives allegedly reaped huge profits by quickly selling the shares when demand for them rocketed.
A House of Representatives financial services committee report said executives of about 20 companies, including former Enron chairman Kenneth Lay and former Tyco chief executive Dennis Kozlowski, had received shares of initial public offerings from Goldman Sachs in a practice known on Wall Street as “spinning”.
Goldman, Credit Suisse First Boston and the Salomon Smith Barney unit of Citigroup, used the shares of sought-after stock offerings to reward the executives for hiring their firms as the investment bankers for their companies, the report says.
The latest accusations sparked a war of words between members of Congress and Wall Street.
“There is no equity in the equities markets,” said Michael Oxley, the Republican committee chairman. “I call on every Wall Street firm to show respect for America’s individual investors by reforming these corrupt practices immediately.”
Goldman immediately dismissed the accusations as rubbish.
“This is an egregious distortion of the facts,” said Lucas Van Praag, a spokesman for Goldman Sachs. “Our investment bankers did not play a role in determining how shares were allocated and our banking clients did not receive favoured treatment. The information [in the report] is accurate, but the inference that the committee has chosen to draw is completely inaccurate. It’s rubbish.”
This is the first time that Goldman has been accused of using allocations of new shares in order to drum up new business, although Salomon is under scrutiny for the practice. On Monday, Eliot Spitzer, the attorney general of New York, sued five senior executives of telecommunications companies to recover the gains they allegedly made on new shares given to them on favourable terms by Salomon.
Investor confidence has been severely undermined by scandals such as Enron, Arthur Andersen, WorldCom, and conflicts of interest on Wall Street. In a high profile case, former Salomon telecoms analyst Jack Grubman is under investigation by securities regulators for possible conflicts of interest by giving upbeat assessments of telecommunications companies, particularly WorldCom, just before the sector crashed.
But Wall Street officials accused Mr Oxley of tarring the whole industry with the same brush. “There is no basis for saying the whole capital underwriting system is deeply flawed,” said James Spellman, a spokesman for the securities industry association, a trade group. “While there have been isolated instances of alleged wrongdoing, the regulators are working now to examine those cases, impose reforms where necessary and take needed enforcement actions.”