Congressional investigators revealed Wednesday that dozens of executives, including eBay Chief Executive Meg Whitman and Yahoo co-founder Jerry Yang, profited in the late 1990s by getting shares of hot initial public offerings from investment banks with which their companies did business.
The disclosures are the latest to emerge out of multiple state and industry investigations into unsavory and possibly illegal Wall Street practices during the heady technology IPO boom.
It’s long been known in Silicon Valley that investment banks award shares to their “best customers” which often included executives of companies for which they had done investment banking. But regulators fear that implicit in their generosity was an assumption that grateful executives would continue to send investment-banking business to their investment-banking patron.
That would be a violation of industry rules by the investment bank and a violation of corporate obligations by an executive.
Neither Whitman nor Yang had any comment.
A House committee examined dozens of companies that were investment-banking clients of Goldman Sachs, Credit Suisse First Boston and Salomon Smith Barney.
Many executive recipients of Goldman Sachs deals got shares in hundreds of IPOs. Some, including Whitman and Yang, “flipped,” or sold, them for quick profit, said Rep. Michael Oxley, the Ohio Republican whose committee released details of its investigation. The report was short on specific dates, the amount of money involved and other facets of the deals.
Whitman’s dealings are further complicated by the fact that she became a Goldman Sachs director in 2001. Goldman Sachs was the lead underwriter of eBay’s 1998 IPO and Yahoo’s 1996 IPO.
“I call on every Wall Street firm to show respect for America’s individual investors by reforming these corrupt practices immediately,” Oxley said.
At least one executive at each of 21 Goldman Sachs IPO companies was given access to other Goldman IPOs, “showing the link between IPO access and investment-banking business,” Oxley said. The practice of allocating shares to such executives became known as “spinning.”
A Goldman Sachs spokesman said the firm was “outraged” at the implication that the firm engaged in spinning. “Any suggestion that Goldman Sachs was involved in spinning or any other inappropriate practices connected with IPO allocations is just simply wrong,” said spokesman Lucas Van Praag.
It’s not just Goldman Sachs in the spotlight. A spokeswoman said Oxley’s committee is still examining similar information provided by Credit Suisse First Boston, whose technology investment-banking practices are among those under review by New York and Massachusetts authorities. Credit Suisse says its accounts were in line with industry norms.
Oxley implied that such arrangements violate the obligation of the executives to make business decisions unmotivated by personal greed. “When executives trade their companies’ investment-banking business, they use the wealth of their firms owned by public shareholders for their own personal gain.”
An eBay spokesman said neither the company nor Whitman had any comment.
Yahoo spokeswoman Joanna Stevens said Yang had no comment. She added that Yahoo had not received a copy of the committee’s report, and that any IPO allocations to Yahoo executives were a private matter between the investment bank and the executives. “Yahoo executives who received pre-IPO stock did so through private banking transactions which Yahoo was not involved with,” Stevens said.
EBay director Robert Kagle confirmed a report in the Wall Street Journal that he accepted shares in IPOs, but he said he did not steer business to Goldman because of the IPO stock.
Kagle, who is also a general partner in Benchmark Capital, also disputed the Journal’s report that he got shares in 25 IPOs, saying the real number of deals he received was “dramatically lower.”
Kagle added that Benchmark was an early investor in most of the companies in which he got IPO stock through Goldman Sachs.
“We often bought stocks in our IPOs as a demonstration of support of the companies. Those stocks have gone down more often than they have gone up,” he said, adding that he still holds most of the IPO shares he got from Goldman.
Oxley’s release also focused on other unsavory practices his committee had unearthed, including undue influence by investment bankers on research analysts and a rush to bring unseasoned companies public.
“Clearly, these are practices that are not acceptable,” said committee spokeswoman Peggy Peterson. “They may be legal, but Wall Street is going to have to clean up its practices,” she said.
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