Goldman Sachs awarded shares in hot initial public offerings to senior executives at 21 companies at the same time the companies were directing lucrative investment banking business to the brokerage firm, according to documents examined by congressional investigators.
The executives included Margaret Whitman, eBay chief executive and a Goldman director, Kenneth Lay, the former Enron chief executive, Dennis Kozlowski, former Tyco chief executive, and John Sidgmore, WorldCom chief executive. Many of the executives quickly sold the shares at huge profits, a practice known as “spinning”. While not illegal, congressional critics have charged the practice allows favoured clients nearly automatic profits and raises questions whether the awards were used directly to entice investment banking business.
The Goldman clients who were singled out for quickly selling their IPO shares included eBay chief executive Margaret Whitman, a Goldman director, and co-founders Jeffrey Skoll and Pierre Omidyar; Global Crossing chief executive John Legere; and Yahoo founder Jerry Yang.
“A small circle of preferred clients were given vast access by the investment banks to IPO shares and reaped large profits on the sale of these shares,” the committee concluded.
It added that it found “possibly illegal under-pricing of IPO shares, potentially improper due diligence in bringing companies to the public markets and questionable use of analytics by analysts to justify unrealistic price targets.”
The findings point to fundamental conflicts embedded within the model of the integrated investment bank which serves both corporate clients and investors.
However, a spokesman for Goldman said: “We think the committee’s statement is highly misleading and in our view an egregious distortion of the facts. The suggestion that Goldman Sachs was involved in ‘spinning’ or any other inappropriate actions relating to IPO allocation is simply wrong.”
Goldman shares fell just over 1 per cent to $64.82 in early trading in New York.
Ms Whitman and Mr Yang each received shares in more than 100 IPOs managed by Goldman since 1996 and rapidly sold on many of the shares for a quick profit. Three other eBay executives also received shares in IPOs.
Ms Whitman’s eBay has paid Goldman $8m in investment banking fees since then.
Tyco International has paid Goldman $57m in fees since 1996. Dennis Kozlowski, its former chief executive, received 7,500 shares in Goldman’s own IPO, while Mark Schwartz, his former chief financial officer, received 5,000 shares in the bank’s IPO.
Global Crossing has paid Goldman $45m in banking fees since 1996. John Legere, chief executive, got nine IPOs from the bank; Leo Hindery, former chief executive, received 5,000 shares in Goldman’s own IPO; and director Stephen Green got more than 75 IPOs. A former director, Barry Porter, received 12 IPOs and sold 11 of them within a week.
Enron paid Goldman $19m in fees. Kenneth Lay, former chief executive, received 23 IPOs. Director Herb Winokur and his wife received more than 50 IPOs and Robert Belfer, another director, got more than 40 IPOs.
Edward Lenk, former chief executive of eToys, received more than 25 IPOs while his company paid Goldman $5m in fees.
Last week, Eliot Spitzer, New York attorney-general, sued Mr Ebbers and the senior executives of three other telecom groups, including Joseph Nacchio of Qwest, who received IPO shares from Salomon Smith Barney at the same time they were doing investment banking business with the brokerage.
Mr Spitzer accused the executives with “profiteering” and his suit sought to disgorge the profits made by the executives.