Just as Goldman Sachs Group prepares to unveil business standards aimed at improving its reputation after settling fraud charges last year, the Facebook stock sale to clients shines new light on the firm’s potential conflicts of interest.
In pitching as much as $1.5 billion in stock in the closely held social-networking company to wealthy investors, Goldman Sachs disclosed that it might sell or hedge its own $375 million investment without warning clients. The company’s disclosures didn’t say one of its star fund managers, Richard A Friedman, rejected the deal as inappropriate for his clients.
Chief Executive Officer Lloyd C Blankfein, 56, created a business standards committee last May after the US Securities and Exchange Commission sued Goldman Sachs for fraud. The SEC alleged that the firm misled investors in a 2007 mortgage-linked investment by failing to inform them of a hedge fund’s plan to bet against the investment. The committee’s report, which could be released as soon as next week, will address how the company can “reinforce the firm’s client focus and improve upon the transparency of our activities,” according to a May statement.
“The committee was undertaken in the hope and the commitment to do some things that were going to help restore and improve trust,” said James Post, a professor at Boston University’s School of Management who focuses on corporate governance and ethics. Instead, “people are going to look at it and say do those standards seem credible in light of the Facebook deal?” Stephen Cohen, a spokesman for the New York-based firm, declined to comment.
SEC inquiry
The SEC has asked Goldman Sachs for information about the offering, according to a person familiar with the matter who spoke on condition of anonymity. The firm disclosed the SEC’s inquiry in a package sent to potential investors, said a person who has seen the document. SEC spokesman John Nester declined to comment. The New York Times reported the SEC inquiry yesterday.
Blankfein, in creating the business standards committee last year, said the firm recognised “a disconnect between how we view the firm and how the broader public perceives our roles and activities.”
In the Facebook deal, Goldman Sachs is using a special purpose vehicle to bundle client investments into a single place, helping the Internet company skirt securities regulations that require any company with more than 499 investors to meet SEC reporting requirements. Comedian Jon Stewart, discussing the deal on “The Daily Show” yesterday, quipped “Oh Goldman, is there any regulation’s intent you can’t subvert?”
Firm’s interests
The documents provided to potential clients in the deal demonstrate that Goldman Sachs’s interests don’t always match those of its clients.
A four-page explanation of the Facebook deal provided to private wealth-management clients showed that, while investors would be subject to “significant restrictions” limiting their ability to sell stakes, the firm’s own holding can be sold or hedged at any time without warning.
“It’s contract terms like these that make GS my favourite stock,” said Brad Hintz, an analyst at Sanford C Bernstein & Co, referring to Goldman Sachs by its stock-market symbol.
The document disclosed that both Goldman Sachs and a Goldman Sachs hedge fund were investing in Facebook. The four- page pitch didn’t say that Goldman Sachs’s private equity fund, overseen by Friedman, had turned down the deal.
Memo for clients
Some information about Goldman Sachs funds that rejected the deal was later included in a “private placement memo” provided yesterday only to clients who expressed interest in the deal, which required that orders be submitted by today, according to a person who has seen the document. On pages 26 and 87, the document said, according to the person:
“Certain investment vehicles managed by the merchant banking division of Goldman Sachs have declined the opportunity to invest in Facebook on terms similar to the fund’s due to a number of factors.”
Another mention on page 86 of the document gives reasons the fund passed on the deal, which include limited opportunity to conduct due diligence, the relative value of Facebook and the inability to obtain management rights or control over Facebook, according to the person who has seen the document.
Goldman Sachs, like most securities firms, treats some clients differently than others. While funds such as Friedman’s Goldman Sachs Capital Partners serve as a fiduciary, requiring they make only the best possible investments for clients, the rest of the firm can sell investors anything deemed “suitable” -- a threshold easily overcome if the buyer is wealthy enough to be defined as a sophisticated investor.
