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IPO Dealings Mar Meg Whitman's Spiffy Image

Peter Eavis

The spotlight wouldn't be beating down on eBay (EBAY Quote) CEO Meg Whitman if Goldman Sachs'(GS Quote) IPOs had been as open as her online auctions.

But they weren't. Instead, Goldman Sachs gave top executives at its investment banking clients "special access" to IPOs it arranged, a congressional committee claimed Wednesday. And in the current ethics-obsessed environment, that sort of privilege could turn out to be especially damaging to the highly respected Whitman, who participated in scores of IPOs as eBay's chief executive.

The market didn't react terribly strongly to the report Thursday, pushing eBay stock down 2.7%. But clearly Whitman is under the microscope, primarily because eBay used Goldman for its own IPO in 1998 and in its $1.5 billion acquisition this year of online bill-payment service PayPal.

Muddying the water further is the executive's relationship with the brokerage firm. Since October last year, Whitman has been a Goldman director and a member of the brokerage's compensation and audit committees. eBay didn't make Whitman available for comment, and spokesman Kevin Pursglove declined to comment on the Goldman IPOs.

Goldman Sachs spokesman Lucas Van Praag said Whitman has not participated in any IPOs since she became a director, and that she remains a private client of Goldman's.

Good Old U.S.A.

The interlocking relationships aside, it hardly can have escaped the committee's attention that Web companies such as eBay continue to live off the bubble-era sentiment that they are more egalitarian than Old Economy firms.

In the eyes of some observers, Whitman's dealings with Goldman will expose that notion as no more than a myth. After all, it's hard to imagine that a midranking employee at eBay would be allowed to do what Whitman did. Companies often have tough rules preventing purchasing managers from taking gifts or getting special deals from the firm's suppliers.

"If a CEO who has been receiving an IPO allocation discovered a purchasing agent had been receiving TV sets from a supplier, he'd be fired without any questions," says Gary Lutin, an investment banker for Lutin & Co.

Goldman's van Praag says Whitman was already a client of Goldman's and didn't get more advantageous treatment in IPOs than similar private clients. Whitman's "level of activity as client was commensurate with her level of activity in IPOs," adds van Praag. A CNBC report Thursday afternoon claimed Whitman made $1.78 million from her IPO activity.

Widespread

Many other corporate chieftains got slabs of Goldman IPOs as well, according to a list published by the House Committee on Financial Services. Some executives on the list have since fallen from grace amid allegations of corporate malfeasance, including Enron's former CEO Ken Lay and Tyco's ex-CEO Dennis Kozlowski and its ex-CFO Mark Swartz.

The committee also named Martin Peretz, a director of TheStreet.com Inc. (TSCM Quote), which publishes this Web site. Peretz said: "I myself haven't had a Goldman account since 1987."

Many of the IPOs were done by tech companies and took place in the late '90s. Back then, tech companies' newly issued shares often soared in trading right after the deal, allowing investors who got in at the IPO price to book large profits. The committee's main complaint deals with conflicts of interest and unfairness.

"The practice of making IPO shares available to those with investment banking business to offer is unfair to average investors who were unable to buy shares until after prices spiked in the first day of offering," the committee said in a press release. It also argues that executives who do this use their firms' influence as investment banking clients "for their own personal gain."

The allegations come on the heels of a suit brought this week by New York Attorney General Eliot Spitzer that demands five corporate executives repay money they allegedly made by participating in IPOs arranged by Salomon Smith Barney. Spitzer named former WorldCom CEO Bernard Ebbers and former Qwest CEO Joseph Nacchio, among others, in the suit.

However, the House committee's press release stops far short of Spitzer's suit. True, like the committee, Spitzer says that giving executives access to IPO shares "was not a harmless corporate perk." But the attorney general sticks his neck out much further and alleges the IPO allocations were "an integral part of a fraudulent scheme to win new investment banking business."

Spizer's case is built on the accusation that the executives failed to disclose an alleged arrangement in which they got favorable stock ratings for their companies and IPO allocations in return for giving Salomon investment banking business. Nothing of this nature is alleged by the House committee.

Goldman Sachs e-commerce analyst Anthony Noto has long given eBay favorable stock ratings. Given eBay's high valuation, Noto's position may well be bad investment advice, but it is hardly out of step with the strong pro-eBay sentiment among other analysts, and so it'd be hard to say he was in any way motivated by a desire to attract eBay's investment banking fees.

What Next?

So can Whitman rest easy? The market seems to think so. But it's too soon for her to take it easy. The committee's findings may lead to further investigations. Whatever the legal developments, this will put a something of a dent in Whitman's standing. Though she has not set herself up as table-pounding paragon of clean corporate governance, eBay under Whitman has gained a reputation for propriety.

Expect Whitman to step down as a Goldman director in the next few weeks. As a member of the audit committee, she's responsible for making sure Goldman's financials are clean -- an enormously important job in the current environment. Sandy Weill, CEO of Citigroup, recently announced plans to quit as an AT&T board member.

Absent further allegations and material, Whitman and eBay probably can brush off the committee's findings. But this is one more piece of proof that the '90s were as greedy a decade as Gordon Gekko's '80s.