This Time, Even Goldman Sashs!

The corporate scandals sweeping the Wall Street sucked in Goldman Sachs this time.

Goldman Sachs was first established in 1869 by Marcus Goldman and his son-in-law Sam Sachs. Ever since, it has maintained a reputation as the best investment bank on the Wall Street. Since the Enron scandal erupted in last December, many corporate scandals arising out of illegal accounting practices have kept popping up on the Wall Street. But Goldman Sachs has not been involved in any of them.

The Banking and Financial Services Committee of US House released a report on October 2, 2002, and announced that it has found out that Goldman Sachs, during the late 1990s when the bull market was at its pinnacle, gave initial public offering (IPO) shares to 21 chief executive officers, chief financial officers, and board directors of its client companies. And they reaped large profits on the sale of these shares. This practice, which is called “spinning” on the Wall Street, has brought huge benefits to the CEOs of renowned corporations such as Margaret Whitman, the CEO of eBay, Jerry Yang, the co-founder of Yahoo and the CEO of Walter Disney.

The House Financial Services Committee argues in the report that in addition to Goldman Sachs, other three investment banks such as Credit Swisss First Boston and Citigroup/Salomon Smith Barney have done the same. In order to induce investment-related works like offering of new shares and M&A, and to make money on the consultation fees, they have awarded the executives with such special favors. In response, the corporations involved denied and said, “The executives themselves received the IOP shares as individual clients of Goldman Sachs. Nothing more, nothing less.”

According to the report, Goldman Sachs has offered CEO Whitman and co-founder Jerry Yang access to IOP shares more than 100 times ever since 1996. They sold them when the price shot up. The Wall Street Journal, which got to come by this report on Oct. 1st, reported, “In case of Whitman, he is still serving as the supervisory director of Goldman Sachs. Thus, it poses a more serious problem.” Other than those, additional 4 executives like Jeffrey Skoll, the co-founder of eBay allegedly received the favor. eBay is one of the main clients of Goldman Sachs.

In addition, Edward Lenk, the former CEO of eToys, have been offered, over more than 25 occasions, access to IOP shares, and the company, in return, has paid $5 million consultation fees to Goldman Sachs. Dinsey, whose CEO has been given 30,000 IOP shares, has paid a total of $51 million of consultation fees to Goldman Sach since 1996.

Rep. Richard Baker (Democrat) on the House Financial Services Committee scolded the improper relationship between the banks and the CEOs and said, “A small circle of preferred clients were given vast access by [Goldman Sachs] to IPO shares and reaped large profits on the sale of these shares.”

Committee Chairman Michael Oxley (Republican) urged, “I call on every Wall Street firm to show respect for America’s individual investors by reforming these corrupt practices immediately.”

Eun-Taek Hong euntack@donga.com