Tuesday, March 12, 2013

The Long Term Fall Out from Spinning: Meg Whitman Continues to Rely on Goldman Sachs

The Long Term Fall Out from Spinning:  Meg Whitman Continues to Rely on Goldman Sachs

A lawyer in Philadelphia reminded me that one of the main offenses committed by investment banks during the IPO binge in the late 1990s was a practice called “spinning.”  Yesterday I wrote about the conflict of interest exposed in Goldman’s Sachs pricing of the eToys IPO during the same period (“Not Going Far Enough: Joe Nocera Explores the Seamy Side of IPOs”).  Today, I want to look at an executive who developed too close a relationship with an investment bank through spinning.
Gotta Hire A Consultant (2003)

Spinning was a way for investment banks to reward corporate executives for their loyalty.  Investment bankers would allocate stock from attractive IPOs to corporate executives in exchange for receiving investment banking work.  As a result, selected executives were able to flip the shares and score quick profits.  The courts found this practice violated the executives’ fiduciary duty to their shareholders[1], and the SEC eventually banned the practice.[2]

One of the beneficiaries of spinning was Meg Whitman, current CEO of Hewlett Packard, who I wrote about last week (“A Test Case For Corporate Activism Is Going to Fail: Hewlett Packard”).  When she was the CEO of EBay, Ms. Whitman and her senior colleagues reaped millions of dollars in profits from IPO shares allocated to them by Goldman Sachs.  At the same time, EBay’s board retained Goldman to underwrite the company’s IPO and a secondary offering, as well as to assist in making acquisitions.  A suit was filed on behalf of EBay’s shareholders to recover the profits from Ms. Whitman and other executives.  After losing on a procedural motion, Ms. Whitman and the other defendants quickly settled the case for an amount that approximated the profits they’d earned from the stock trades.

After receiving shares under the spinning arrangement, Ms. Whitman was appointed to Goldman’s board in 2001 and resigned when the spinning controversy surfaced.  Then when Ms. Whitman ran for Governor, guess who was a major contributor to her campaign?  Goldman Sachs.  Who manages at least part of Ms. Whitman’s personal fortune?  Goldman Sachs. And when activist shareholders like Relational Investors began to buy stock in HP, who did Ms. Whitman turn to in September 2011 to advise Hewlett Packard?  Goldman Sachs.   Finally, who was advising Autonomy, the ill-fated enterprise software company acquired by HP in October 2011? Among others, Goldman Sachs.  In other words, Ms. Whitman hired the very firm that was simultaneously representing the company she was trying to acquire.

In my view, Ms. Whitman’s myriad of relationships with Goldman Sachs shows a certain lack of good judgment.  Given HP’s myriad of strategic challenges, the company probably needs someone who is open to a variety of views.  It looks to me like Ms. Whitman is way to partial to one view: Goldman’s view.  Although Ms. Whitman has only been at Hewlett Packard’s helm for two-years, perhaps she should be one of the directors shareholders vote against at the upcoming annual meeting.

[1] IN RE: EBAY, INC. SHAREHOLDERS LITIGATION I, C.A. No. 19988-NC, February 11, 2004
[2] The SEC only completely the rulemaking prohibiting spinning” on September 29, 2010, some 8 years after the rule was proposed.

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