Panel's Report Offers Details On 'Spinning' Of New Stocks
A Congressional committee is accusing the Goldman Sachs Group and two other investment banks of rewarding senior executives of their corporate clients with preferential allocations of new stocks, according to a committee document obtained yesterday.
The House Financial Services Committee found that executives of about 20 companies, including the chief executive of eBay and a founder of Yahoo, received shares of initial public offerings from Goldman Sachs in a practice known on Wall Street as ''spinning,'' the report says. Margaret Whitman, eBay's chief executive and a director of Goldman Sachs, was among the officers and directors who ''flipped,'' or quickly sold, shares of new stocks for quick profits, the report says.
Goldman and two other firms, 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. And the firms' analysts recommended the new stocks to investors long after their value had fallen, the report says.
The committee concluded that average investors had been harmed by the banks' practices, which the report said included ''possibly illegal underpricing'' of initial public offerings.
''There is no equity in the equities markets,'' said Representative Michael G. Oxley, a Republican from Ohio and the chairman of the committee. ''I call on every Wall Street firm to show respect for America's individual investors by reforming these corrupt practices immediately.''
Among other executives who received preferential treatment, according to the committee, were Jerry Yang, a founder of Yahoo, and Pierre Omidyar, the founder and chairman of eBay. Goldman took eBay public in 1998 and Yahoo public in 1996.
Some executives received shares in more than 100 stock offerings underwritten by Goldman Sachs, including the first sale of its own stock in 1999, the report says.
A spokesman for eBay, Kevin Pursglove, said Ms. Whitman and Mr. Omidyar declined to comment. A spokeswoman for Yahoo said, ''Mr. Yang is not responsible for engaging investment banks on Yahoo's behalf. She added, ''Yahoo executives who received I.P.O. stock did so through private banking relationships, in which Yahoo was not involved.''
The report is the first to assert that Goldman Sachs participated in spinning.
On Monday, Eliot Spitzer, the attorney general of New York, sued five senior executives of telecommunications companies to recover the gains they reportedly made on new shares that were spun to them by Salomon.
Goldman Sachs officials were outraged by the committee's findings and its conclusion that Goldman Sachs traded shares of other companies and inflated stock ratings for investment banking fees.
''This is an egregious distortion of the facts,'' said Lucas Van Praag, a spokesman for Goldman Sachs. ''The suggestion that Goldman Sachs was involved in spinning or other inappropriate practices around I.P.O. allocations is simply wrong. Nor is it correct to say that investment banking clients received preferential treatment or were rewarded with share allocations.''
He said Goldman Sachs sold shares of new stocks only to executives who were brokerage clients of the firm and who requested them. Some other firms have been accused of surprising influential executives by allocating hot stocks to them and quickly reselling the shares for profits that wound up in their accounts.
The committee provided less detail on First Boston and Salomon, but found that both had allocated shares of new stocks to banking clients. Salomon officials are trying to settle investigations by Mr. Spitzer and national securities regulators. First Boston paid $100 million in penalties early this year to end investigations into its demands for kickbacks from buyers of new stocks.
A spokeswoman for Citigroup declined to comment, citing ''discussions with regulators to resolve all research and I.P.O. issues.''
A spokeswoman for First Boston said, ''We continue to support governmental and regulatory authorities as we all work together to restore investor confidence.''
Officials on Wall Street took offense at Mr. Oxley's broad swipe at the industry.
''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.We hope the committee's final report provides a fair portrayal of the public offering process in any conclusions or recommendations that it makes.''