Goldman Fails to See Hype That Derailed Facebook's Private SaleRead the entire article here
Jan. 18 (Bloomberg) -- Goldman Sachs Group Inc.’s decision to scuttle a sale of Facebook Inc. shares to U.S. investors shows the bank miscalculated by trying to privately offer stock in a company with more than 600 million users.
In a statement yesterday, New York-based Goldman Sachs said the sale, first reported Jan. 2, will be restricted to non-U.S. investors because “the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law.” The firm planned to sell as much as $1.5 billion of closely held Facebook to clients of its private wealth unit.
U.S. securities laws restrict advertisements and solicitations of stock offered in private placements, a type of sale that requires less disclosure because only sophisticated investors can participate. That prohibition clashed with the public’s interest in Facebook, an Internet social-network whose creation in 2004 is the subject of a hit movie, “The Social Network,” that won four Golden Globe awards on Jan. 16.
“You would have thought that this was an issue from the start, they should have realized this up front,” said Peter Hahn, a lecturer in corporate finance at Cass Business School in London. “If I invited my 500 best friends to a party, would it be a secret? And the answer is no.”
The setback comes six months after Goldman Sachs, the most profitable firm in Wall Street history, paid $550 million to settle civil fraud charges brought by the U.S. Securities and Exchange Commission over the 2007 sale of a mortgage-linked investment called Abacus. The firm said it made a “mistake” by failing to disclose to investors that a hedge fund was involved both in structuring the investment and planning to bet against it. The bank is scheduled to report 2010 earnings on Jan. 19.
In the Facebook deal, Goldman Sachs and funds managed by the firm agreed to invest $450 million in Facebook, along with an additional $50 million from Russia’s Digital Sky Technologies, before the bank began soliciting wealthy clients about investing in a special purpose vehicle that would hold additional shares.
A four-page offering document that was provided to private wealth clients in early January and obtained by Bloomberg News said that Goldman Sachs could “at any time” reduce its Facebook stake through hedging or sales without notifying investors. The same document said that investors in the special purpose vehicle would be subject to “significant restrictions” limiting their ability to sell stakes.
More information about the offer, including the rejection of the Facebook deal by some Goldman Sachs funds, was contained in a longer “private placement memo” made available to clients subsequently.
“The whole thing frankly has been an embarrassment to Goldman because this was supposed to be a private placement,” said William Cohan, a Bloomberg Television contributing editor who is writing a book about the firm. “It’s turned out to be extremely public.”
A failure to keep such an offering private can draw SEC scrutiny. The regulator, whose rules require any company with more than 499 investors to disclose financial information, was already examining the market for trading shares of closely held companies including Facebook, a person familiar with the inquiry said earlier this month.
David Wells, a spokesman at Goldman Sachs in New York, declined to comment.
The firm, led by Chief Executive Officer Lloyd Blankfein, 56, said its decision not to proceed with the U.S. offering “was based on the sole judgment of Goldman Sachs and was not required or requested by any other party.” Still, some securities law experts said they thought the SEC probably influenced the decision.
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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage". In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia
Tuesday, January 18, 2011
Public pressure and publicity can make a difference in how banks like Goldman Sachs conduct business, as seen by GS's decision to restrict investment in Facebook to other than US investors. GS doesn't like the rules so it takes its ball and plays elsewhere. Sure, GS would like to operate in private and without restrictions or regulations and away from headlines, as it has in the past. But there cannot be too much scrutiny on Goldman Sachs. People have to demand honesty, ethical behavior and social responsibiltity and regulations for their banks, including Goldman Sachs.