Why ‘Spinning,’ Now Illegal, Was Always Unethical
What Calbuzz does not know about corporate finance fills mountains of textbooks. But because we expect it won’t be long before we’re hearing a lot about charges of stock spinning against Meg Whitman, when she was CEO of eBay, we asked David Shapiro, a specialist on financial fraud at the John Jay College of Criminal Justice at the City University of New York, to spell it out for us. Here’s his offering:
By David Shapiro
Special to Calbuzz
In April 2005, Meg Whitman, CEO of eBay from 1998-2008, settled – without admitting wrongdoing – a case in which she and others had been charged with “spinning” initial public offerings (IPOs) that had been made available to her at a discount by Goldman Sachs in exchange — it was alleged — for Goldman getting eBay’s investment banking business.
Whitman and co-defendants Pierre Omidyar and Jeffrey Skoll agreed to disgorge their profits and pay $3 million (Whitman’s share was $1.78 million) into an eBay fund that was supplemented by a payment of $395,000 from Goldman Sachs. (Robert Kagle, another co-defendant and former member of eBay’s Audit Committee during the relevant period, did not contribute to the fund apparently because he did not earn any profits from spinning IPOs.)
“Spinning” is obtaining, from securities firms such as Goldman Sachs, shares of stock in start-up companies’ IPOs at a preferred price (that is, a discount) not available to ordinary retail investors. This enables investors like Whitman to make a short-term profit by selling the stock in the secondary market, days if not hours later, to retail investors at non-discounted prices.
The practice is now expressly illegal because it was deemed to be theft by favoritism. The social harm that now is outlawed entails the wrongful delivery of the monetary value of the discounts to preferred investors selected by securities firms. The start-up company selling the IPO could have obtained a higher price by selling directly to ordinary investors if the securities firm had not sold them to selected investors at a discount.
Whitman has insisted that Goldman Sachs’s motivation in giving her opportunities to spin IPOs was due to her status as a pre-existing wealthy client of theirs, which she was, and not as disguised kickbacks or commercial bribery from Goldman Sachs to get eBay’s investment banking business, which they did in fact obtain.
The issue has been spun by Whitman apologists and others into: What were Goldman Sachs’ and Whitman’s respective motivations and intentions in giving and accepting the opportunities to spin?
Issues such as the appearance of impropriety, conflict of interest, breach of ethics, breach of duty of loyalty, etc. presumably take a backseat, while voters in California ponder: What exactly were those motivations and intentions?
I seek to avoid this “he said, she said” cul-de-sac.
Conduct has two parts under our legal system: The act and the accompanying state of mind of the actor.
Apparently, the best that Whitman can argue is that while she did perform the acts – receiving and then rapidly selling discounted shares unavailable to ordinary retail investors from a vendor (Goldman Sachs) competing for work from her principal (eBay) – she is not a criminal because Goldman Sachs had other reasons for favoring her: for example, she was rich.
No formal fact-finder such as a judge or jury has passed judgment on what happened, including Goldman Sachs’s alleged innocence in demonstrating favoritism to Whitman, who also served briefly on the Board of Directors of Goldman Sachs. Therefore, she’s not a criminal under the law. But was she ethical?
The House Financial Services Committee released data to the public in early October 2002 regarding the spinning issues, naming beneficiaries of Goldman Sachs that included Whitman. According to eBay’s Code of Business Conduct and Ethics adopted by eBay in 2002 under the section “Receipt of Favors and Gifts” Whitman’s conduct in the spinning adventures would have been expressly unethical had these principles and rules been effective while she spun, notwithstanding her pre-existing wealth or Goldman Sachs’s alleged innocent reasons for favoring her.
Essential issues, such as whether Whitman requires express and detailed guidance from others in order to behave ethically and whether she can admit to having acted unethically, are still unresolved.
The excuse that “it wasn’t expressly prohibited when I did it” might have proven useful in fending off regulatory agencies such as the Securities and Exchange Commission, but how persuasive is this excuse in the context of determining what is ethical?
Couldn’t Whitman have determined, on her own, the implications of receiving favors and gifts from vendors? Is she to be held to the same standard as my 12-year-old daughter who ate all of the chocolate chip cookies because I didn’t say she couldn’t?
Whitman may be many things, but naïve is not likely one. Unfortunately, receiving favors and perks on account of wealth and position is neither unusual nor novel, and determining precisely whether Goldman Sachs’s favors were attributable to her highly valued personal portfolio of investments or her position as eBay CEO is presently irrelevant.
The existence of express prohibitions in eBay’s Code of Business Conduct against receiving the kinds of favors and gifts that she had received from Goldman Sachs might have been a condition of settlement with regulatory authorities or perhaps indicative of the proverbial “closing the barn door after the horses have left.” I don’t know.
Whitman has neither conceded that her spinning conduct was unethical nor conceded that there’s something broken in a social system that allows the wealthy to benefit at the expense of the ordinary. California voters will have to decide what that says about Meg Whitman’s ethics and her fitness to be governor.
Assistant Professor David Shapiro teaches courses in Financial Accounting, Management Accounting, Forensic Accounting, Forensic Financial Analysis, and Public Sector Accounting and Auditing. His research is focused on measuring and evaluating the relationship between law and financial fraud. He has worked extensively in the private sector, conducting numerous investigations of misappropriations, fraudulent financial reporting, and corruption in different types of organizations, including public filers and labor unions. He is a contributing author to the “CPA’s Handbook of Fraud” published by the American Institute of Certified Public Accountants.
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