The Goldman Sachs Facebook Deal: Is This Business as Usual?
Published : January 19, 2011 in
Just six months after paying a record $550 million to settle a federal
fraud case, Goldman Sachs finds itself in a new controversy over an
investment in Facebook, the social networking site. The firm's plan
had been to raise about $1.5 billion for the social networking
company by allowing individuals to invest in a special fund that
would count as a single investor. Some critics say the deal was
designed to skirt securities regulations and is marred by conflict of
interest, while others argue this type of investment puts taxpayers
at risk, since Goldman can support its business with cheap
Amid these criticisms, Goldman abruptly changed course on
January 17 and announced that, contrary to the original plan, U.S.
investors would be barred from a Facebook private stock offering.
Many observers saw the move -- limiting investment to foreigners -- as a serious embarrassment, if not an
admission that Goldman had been treading too close to the regulatory line.
Despite the controversy, many experts note that it is not unusual for a big Wall Street firm to take part in
deals not open to ordinary investors. Nor is it unusual for such firms to wear multiple hats -- investing
their own money in deals also marketed to clients, underwriting stock offerings while evaluating stocks
for investors, or managing money for corporations and their executives while doing other business
involving those firms.
So, is the Facebook deal business as usual -- or is it crossing the line?
"Investment banks are always looking for innovation; they're always looking for new markets," says
Wharton adjunct finance professor
. Often, he notes, that means looking for "ways around
... They are paid to be creative."
But, he adds, Goldman's use of a special purpose vehicle for the Facebook deal is unusual. The vehicle is
similar to a small mutual fund that will only own Facebook shares. The fund will count as one Facebook
investor, allowing Facebook to avoid regulations that would require detailed financial and accounting
disclosures if it had more than 499 shareholders. This approach, says Wessels, "might follow the letter of
the law but it certainly doesn't follow the spirit of the law." (Goldman did not respond to requests for
comment before Knowledge@Wharton's publication deadline.)
Complaints about the deal are not as severe as those involving last summer's Abacus case, where
Goldman was accused of urging clients to buy securities that were designed to fail. Those securities were
created for a hedge fund that wanted to bet the mortgage market would decline. To work as planned, the
securities had to be sold to investors who would bet the market would go up.
Still, the Facebook deal was somewhat out of the ordinary from the start, even though Wall Street firms