Now Joe Nocera has obtained, due to a clerical error, documents detailing Goldman Sachs screwing its IPO clients. Goldman’s clients, eToys, are in the midst of a lawsuit against Goldman. eToys is claiming Goldman conspired to keep the price of the IPO low to benefit their investment bank clients who gave Goldman a kickback in return. eToys later went out of business partly due to lacking capital that it could have raised in a more honest IPO.
Recently, however, I came across a cache of documents related to the eToys litigation that seem to tilt the argument in favor of the skeptics. Although the documents were supposed to be under seal, they were sitting in a file at the New York County Clerk’s Office, available to anyone who asked for them. I asked.
What they clearly show is that Goldman knew exactly what it was doing when it underpriced the eToys I.P.O. — and many others as well. (According to the lawsuit, Fitt led around a dozen underwritings in 1999, several of which were also woefully underpriced.) Taken in their entirety, the e-mails and internal reports show Goldman took advantage of naïve Internet start-ups to fatten its own bottom line.
The documents detail that Goldman’s focus was on using the eToys IPO to generate more business with its investment clients. After the investment clients profited the Goldman Sales force sprung into action calling the clients to secure more business gaining large commissions. A quid pro quo with eToys and other IPO clients losing out.
Goldman carefully calculated the first-day gains reaped by its investment clients. After compiling the numbers in something it called a trade-up report, the Goldman sales force would call on clients, show them how much they had made from Goldman’s I.P.O.’s and demand that they reward Goldman with increased business. It was not unusual for Goldman sales representatives to ask that 30 to 50 percent of the first-day profits be returned to Goldman via commissions, according to depositions given in the case.
“What specifically do you recall” your Goldman broker wanting, asked one of the plaintiffs’ lawyers in a deposition with an investor named Andrew Hale Siegal.
“You made $50,000, how about $25,000 back?” came the answer. “You know, you made a killing.”
“Did he ever explain to you how to pay it back?” asked the lawyer.
“No. But we both knew that I knew how,” Siegal replied. “I mean, commissions, however I could generate.”
30-50%! Now that’s an incentive structure.
Luckily for Goldman Sachs they were not so greedy they forgot to do another kickback, this one in the form of bribes to Congress and the President. Otherwise they might have to actually suffer for their misbehavior. But having bought protection from the Justice Department while getting massive subsidies and bailout guarantees from the Federal Reserve ensures Goldman’s continued survival and dominance. And as long as Goldman has the government behind them they will have clients no matter how likely they are to treat them like Muppets.