Talk:Initial public offering/Archives/2013

Corruption

I think the findings in http://www.nytimes.com/2013/03/10/opinion/sunday/nocera-rigging-the-ipo-game.html should be added to this article. EllenCT (talk) 04:28, 10 March 2013 (UTC)

See also: http://blogs.reuters.com/felix-salmon/2013/03/11/where-banks-really-make-money-on-ipos/ EllenCT (talk) 10:33, 11 March 2013 (UTC)

I added these. EllenCT (talk) 04:34, 14 March 2013 (UTC)

I've copied this response from my talk page, pertaining to this removal: EllenCT (talk) 22:15, 29 March 2013 (UTC)

Hello EllenCT

I have recently removed a paragraph from Initial Public Offering that you may have worked on, or contributed to. The paragraph contained allegations made by a plaintiff in an ongoing lawsuit, and was supported with a reference to a NYT Op/Ed piece. The allegations were presented as fact, rather than allegations. The Op/Ed piece was presented as fact, rather than as an opinion of the specific author. The author's interpretations of legal documents and securities underwriting activities were presented as fact, without reference to the author's background and knowledge of either the law or corporate finance. No attempt was made within the paragraph to present a balanced presentation of arguments made by both sides of the issue. The paragraph heading was inflammatory, and presumed the truth of Plaintiff's allegations.

I believe that the information you were attempting to present does have a place within the article. But that would require a re-write, as a neutral, with careful attention paid to the sorting out (and identification) of facts from allegations and opinions. Gulbenk (talk) 05:37, 29 March 2013 (UTC)

I agree with your concerns and will try to address them. There are a few things I want to mention: Joe Nocera is an experienced Wall Street business reporter whose work for the New York Times has only appeared as a column in the business section's opinion pages for years, but I think it's clear that he considers himself a factual beat reporter for columns such as these when he's reporting from primary sources. The NYT says that they fact-check their op-eds, and while there is plenty of evidence that they don't always do a good job of it, they do issue corrections in such cases. Felix Salmon has been Reuters' Wall Street correspondent for many years, and seemed much less surprised by the revelations in the discovery documents than Nocera (although they led him to retract his recent claim that a 7% IPO fee charged by Goldman Sachs aligns their interests with their customers'), specifically stating towards the end of his piece that the practice is widespread and likely to continue. As to whether they were reporting the plaintiff's specific allegations or directly from the discovery documents, the text of the links above seems clear that both were referring to the documents authored by Goldman. I will look around for other sources and try to rephrase the section by including opposing viewpoints if I can find any, making it clear that the kickback bribery is alleged instead of proven, and attributing statements to the journalists. To the extent that Salmon is correct about the extent of the practice, I think readers would be far better served to have a light shined on it than brushing it under the rug. EllenCT (talk) 22:15, 29 March 2013 (UTC)

I found [1] which seems to be a fairly balanced take by an impeccable news analysis source. Among the bloggers that I had to wade through, [2] seemed to be nearest to median opinion. EllenCT (talk) 00:05, 30 March 2013 (UTC)

The securities markets were acting with "irrational exuberance" during the dot.com era. What sort of valuation metric does one ethically apply during such times? Should Goldman have marked up their dot.com offerings to irrational levels, to take full advantage of the exuberance? Was their use of more conventional valuation methods an intentional attempt to funnel unjust profits to institutional clients, at the expense of the underwriting client? Or were they compelled to use more rational pricing methodology? Insight into those questions might be gained through one of the simple rules applied to every solicited securities transaction: A broker must have a reasonable basis for making a purchase recommendation. That effectivly prohibits a broker from recommending an irrationally priced security in an irrational market. If a broker is prohibited from recommending the purchase of an irrationally priced security, does it not stand to reason that a brokerage firm might feel ethically or legally prohibited from offering an irrationally priced IPO? In some future litigation, could an underwriter defend selling an institutional client shares of an IPO that was knowingly priced at an irrational level? Might the bet by Lawton Fitt be simply a comment on the frenzy and irrational nature of the marketplace, by one was was compelled to stand apart from that frenzy? It is worth noting that eToys was not compelled to use Goldman in the first place. They could have pursued a uniform price auction, which would have been more effective at price discovery, without the ethical/legal constraints. Gulbenk (talk) 05:57, 30 March 2013 (UTC)

The issue here is that the brokers have no incentive to take advantage of any support for a reasonable valuation decision, whether based on rational or irrational factors, because they've been shaking down the institutional flippers. That puts their interests, supposedly in a 7% underwriting fee, against the interests of the fundraisers, because the brokers stand to gain much more than 7% if the valuation is low relative to the first few days' trades. Here's Nocera's paragraph which Salmon quoted as the reason he had to retract his earlier assertions on the subject:

"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."

Salmon continues with specific reference to the discovery documents:

"Some big names jump out from the documents here — none more so than Bob Steel, who was then Goldman’s co-head of equity sales, and who went on to put out financial-crisis fires for Hank Paulson at Treasury before going on to become the CEO of Wachovia. Steel wrote a detailed email to Tim Ferguson, the chief investment strategist at Putnam Investments, saying that he would try to help Putnam out “with regard to IPO allocations”. At the same time, however, he added that “we should be rewarded with additional secondary business for offering access to capital markets product”. Which, in English, means that if Putnam got access to Goldman’s IPOs, it would have to steer more soft-dollar commissions to Goldman.

"Meanwhile, if you didn’t toe the investment banks’ line, they would cut you. Toby Lenk was the CEO of eToys, and in a 2006 deposition he was asked whether he ever “voiced any displeasure” with Goldman about the fact that they left so much money on the table. He said no — and added “a little story” about why it was never a good idea to annoy a big investment bank...." (The story is worth reading at [3])

There is a difference between a broker recommending a security and expecting in no uncertain terms to be repaid from institutions flipping that security. Also, there was no way to know whether a higher IPO valuation for eToys would have been more or less rational than the chosen valuation. They were trying to compete with Amazon when Amazon was much smaller both in sales and market share. Who is to say that the cash from a larger valuation wasn't needed to achieve profitability? EllenCT (talk) 07:08, 30 March 2013 (UTC)

So, there is no way to determine a rational price? Your suggestion that consideration should be given to the amount of cash needed to achieve profitability is more properly applied to the question of whether the IPO is suitable in the first place. Any number of marginal enterprises might be made "profitable" with enough interest-free cash.

In this discussion there has been a breezy disregard for compartmentalization of decision making and the chinese wall at Goldman. The CEO and partners may have viewed the process as one, but the separate profit centers within Goldman would have been incentivized according to their own singular objective, and restrained according to their specific regulatory environment. The only reason the eToys plaintiffs would have for linking the (so called) "kickback" scheme by sales to the pricing of the IPO by underwriting is to construct a larger conspiracy, by Goldman, to defraud the underwriting client (eToys) of a portion of the market value of their stock. Given the vagaries of the marketplace, and the irrational nature of the IPO market during the dot.com era, Plaintiffs would have had a difficult time proving their case if the only argument centered on the methodology of pricing. So they construct a conspiracy out of disparate events. That conspiracy remains unproven, which may relate to why the dicovery documents are under seal. To give some color to the sales side of this story, it would help to understand the process from a broker perspective. A broker who sells shares of an IPO is compensated with a portion of the selling concession (in lieu of a commission). That compensation is denied the broker if the client sells the allocated shares within a certain period of time after the IPO launch. The "penalty bid" is intended to discourage flipping. So a broker gets nothing if the client flips the stock. Under those circumstances, it would be natural for the broker to reference the client's profitable transaction and ask for more business. Brokers ask for more business every day. If there is an admission in the record that a client undertook (unsolicited) transactions that he regarded as pointless, it only proves that the client crafted an inelegant (bordering on hamfisted) response to the broker's legitimate request for more business. It does not prove a "kickback" scheme or a larger company-wide conspiracy.

The application of a few critical thinking principals to this situation may provide a better framework for evaluating the competing claims.Gulbenk (talk) 18:40, 30 March 2013 (UTC)

To clarify, I don't know how Goldman handled their penalty bid during this era. Each firm determines how that is applied. The process outlined is the norm, and while it is likely that Goldman followed the model I cannot be certain.Gulbenk (talk) 04:00, 31 March 2013 (UTC)

• Chiming in with a random third opinion - while I understand there may a concern that the information is a bit scandalous, it's generally much more productive to focus the discussion around specific edits and for the other side to come up with an alternative proposal (similarly, in board meetings debate is always better when there's a motion on the table). Gulbenk said this information deserves to be in the article, so he should propose something. If not, try another edit with some tweaks. In any case, as someone who's been around the securities articles here on Wikipedia more than most (and recently did some major overhauling at investment banking), I strongly approve of this in the article. II | (t - c) 00:20, 2 April 2013 (UTC)

Thanks II | (t - c), a good suggestion.

If one looks at the information as a series of allegations, rather than established facts (or facts without an established correlation), then a separate section under the heading of "Corruption" would be inappropriate. Corruption and conspiracy have not been established. That leaves us with (an undisputed fact): a controversy concerning the pricing of a specific IPO, during the dot.com era. That topic would, I believe, be appropriate to add to the (existing) section Pricing of IPO. One could state the allegations (as allegations) and cite the supporting NYT opinion column (as an opinion of the author/columnist). That should be balanced against excerpts from news articles or columns containing Goldman's position on the issue (if such articles or columns exist), or a reference to Defendant's statements in their answer to Plaintiff's complaint (if that is a public document). But I think that the primary thrust of the paragraph should be that pricing is an inexact art, particularly during periods of market instability, and that can lead to disputes between the underwriters and the client (or the client's creditors). That would be an interesting and meaningful addition to the article. If the dispute is eventually resolved in Plaintiff's favor, and elements of conspiracy and/or kickbacks are proven in court (or through some regulatory action) then a separate section on corruption would be quite appropriate.

I would defer to EllenCT, who should be accorded the opportunity to write the revised paragraph(s), as the one who first brought this information to the article. Gulbenk (talk) 03:32, 2 April 2013 (UTC)

Hopefully we can find a source which can put this into the broader perspective of kickbacks in IPOs. Kickbacks have been an integral part of finance for a long time; in real estate, the U.S. has had RESPA for a long time to prevent it. Currently ongoing controversies include collateral protection insurance scandal (see New York's settlement or FHFA's new rules) with lenders in the U.S. or the payment protection insurance scandal in the UK. IPOs would sort of seem to be less susceptible to reverse competition than these cases, but that doesn't mean it isn't a huge part of the business. II | (t - c) 04:21, 2 April 2013 (UTC)

If the focus is kickbacks, your best bet for information would likely be FINRA. http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122490.pdf This touches on "spinning", as well. Gulbenk (talk) 05:14, 2 April 2013 (UTC)

I'm sorry. I took a much-needed wikibreak. I will replace something similar but much more neutral as I promised above now. EllenCT (talk) 19:19, 3 April 2013 (UTC)

Good job. Take a look at my edits, to see if there is anything you want to alter. I think the term "kickback bribery" is a bit like saying cow animal. So that was shortened to kickback (although FINRA refers to it as two words: kick back). Also, I changed the part where you had the underwriting client (which is the company going public) flipping the stock. That, of course, would be a sales client, likely an institutional investor. Without a counter balancing statement from Goldman, it would be important to state that the suit is ongoing and that the allegations are unproven. That was added to the end of the paragraph. Other than that, just a few minor copyedits. I may, at some later time, add a reference to FINRA rule 5131, under the heading of "Regulations" (or such). Again, good work! Gulbenk (talk) 23:14, 3 April 2013 (UTC)

Thanks very much; especially for correcting that client/institution mistake. Your further edit is a complete improvement over my wording. EllenCT (talk) 23:34, 3 April 2013 (UTC)