Lawmakers investigating shady Wall Street dealings released information Wednesday that they claim shows Goldman Sachs wooed investment banking business from companies by giving their executives stock in new Internet companies. Goldman Sachs, which immediately denounced the report, is just the latest firm to face accusations of ”spinning” that is, giving shares in initial public offerings, as a kind of payment, to executives and directors of other companies that are or become clients.
Salomon Smith Barney and Credit Suisse First Boston also are under scrutiny by the House Financial Services Committee. And Monday, New York’s attorney general filed a lawsuit against executives at four companies who got shares in Salomon’s IPOs, demanding they give back their profits.
Michael Oxley, R-Ohio, chairman of the committee, said the IPO system was ”rigged,” and called on Wall Street to reform ”these corrupt practices immediately.”
The committee looked at 21 Internet companies Goldman Sachs took public and said that at least one executive or director of those companies got shares in other Goldman IPOs. For example, it said Meg Whitman, president and CEO of eBay, and Jerry Yang, co-founder of Yahoo, both bought shares in more than 100 of Goldman’s IPOs.
The committee did not say how much money any of the executives made or lost when they sold the shares, and several of the executives disputed the committee’s report. Whitman and Yang could not be reached for comment.
”This is an egregious distortion of the facts,” said Goldman’s Lucas Van Praag. ”The investment bankers play no role in how shares are allocated, and banking clients did not receive favored treatment.”
Nevertheless, there is a growing public outcry about the appearance of some of these deals.
Clay Corbus, a senior managing director for W.R. Hambrecht, says the best solution is for Wall Street to use an open auction system to allocate an IPO and determine an opening price which is the method Hambrecht employs.
”You fix all of that preferential treatment whether the allocation is to a potential client, friend of the firm or institution who is throwing back commissions to the investment bank,” he said.
Jay Ritter, a professor at the University of Florida, says officers of a public company or a company going public should be barred from getting IPO allocations at the offer price. If an officer likes a stock, they ”can buy it at the market price like everyone else,” he says. That would greatly limit investment banks’ opportunities to use IPO shares as payments, Ritter says.