Goldman Sachs

Allegations against Goldman Sachs have focused on the company's practice of 'laddering' public offerings. The firm is one of twelve companies that have been examined since the alarming Merrill Lynch investigation by Eliot Spitzer.

The Company

Goldman Sachs is a major investment banking firm that operates across the world. It is headquartered in New York, where it has been operating since 1869. Goldman Sachs has performed investment banking for such clients as Enron, Ford Motors, Tyco and WorldCom. It was divulged through recent investigations that the executives of these companies, Kenneth Lay, William Ford, Dennis Kozlowski, and John Sidgmore, respectively, received IPO shares from Goldman Sachs. The firm is suspected of having offered these and other investment banking clients' large portions of IPO shares in return for their continued business.
IPOs frequently generate large sums of money in short periods of time. When a company begins to trade publicly it issues its first shares through an underwriting firm. The firm (or firms, if more than one is underwriting the opening) will, in exchange for banking fees, evaluate what price the shares should initially be offered at, and how many shares should be sold. It will then sell them to investors. The opening company is guaranteed a specific sum of money from the firm (or firms) that underwrite its opening. Underwriting firms assume the risk in an IPO. When a firm holds IPO shares it may offer them to its clients before public trading commences.


In a process called 'laddering,' IPO shares are offered to particular clients by underwriting firms under the understanding that they will purchase more shares at a specified price after the opening company begins publicly trading. These 'particular clients' are frequently executives of companies that the underwriting firm does banking business with (and wishes to do further business with). The practice of laddering tricks the market. Investors observe that an IPO stock's prices are rising and join in the trading, assuming the shares are moving at an honest rate. Laddering artificially balloons the value of a stock, making it appear to be a hot pick before investors. After the IPO stock's value rises, the client-investors often sell their shares and make huge profits. Those who are not client-investors of the underwriting firms, and thus not aware that the value of the stock has been inflated, fail to sell, and end up holding highly overpriced shares.

Pending Allegations

In May of 2002 eToys filed a lawsuit against Goldman Sachs for allegedly projecting the value of its IPO stock too low. The company began publicly trading in May of 1999. By March of 2001 it was bankrupt. EToys claims that it would have had a better chance of survival if it had received more money on its IPO. The shares were valued by Goldman Sachs at twenty dollars each. By the end of the first day of trading they were selling at over seventy-five dollars.
In November of 2002 it was reported that the SEC had issued a "Wells Notice" to Goldman Sachs. A "Wells Notice" is a formal warning sent to a company from the SEC that informs it that there is reason for the SEC to pursue securities fraud charges against it. Goldman Sachs was informed that its IPO practices, which had been the subject of investigation, could lead to a civil-securities fraud charge.

Company Recourse

In June of 2002 Hank Paulson, the chairman and CEO of Goldman Sachs, issued an address in support of the SEC's actions against Wall Street. Paulson advised that further measures be taken to restore the confidence of investors. Later, in November, the firm publicly responded to the "Wells Notice," maintaining that it had not committed securities fraud and that the SEC's allegations were unfounded. The SEC has continued its investigations.

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