Whitman's IPO stock deals have critics raising ethics issues

Along with considerable acclaim for her business acumen, former eBay chief executive Meg Whitman attracted controversy and criticism for accepting exclusive opportunities to invest in initial public stock offerings during the thriving dot-com era.

The practice led to a shareholder lawsuit against Whitman and others. It also exposed Whitman to the national political scene when her investment drew a public thrashing by Congress.

Now, as a contender for the Republican gubernatorial nomination in California, Whitman may face deeper scrutiny for her involvement in the since-banned financial practice called "spinning."

She has repeatedly insisted that an investment firm gave her access to more than 100 IPO stocks because she was one of the firm's wealthy private clients, not because she picked the firm to handle eBay's own IPO.

That explanation didn't wash with a Delaware judge, however. In a 2004 preliminary ruling in an eBay shareholders' lawsuit, the judge accused Whitman and other company executives of a conflict of interest.

Whitman and two others settled the lawsuit in 2005, admitting no wrongdoing.

How Whitman handled herself when those stock dealings came to light is particularly pertinent to her potential run for governor, according to David Shapiro, a professor at City University of New York, who specializes in financial fraud and corruption.

"She had no understanding of the appearance of impropriety," Shapiro said. "She didn't apologize. She didn't acknowledge in hindsight that it didn't look good.

"The question now is: what will become of all the conflicts of interest that come before her as governor?"

A $1.7 million spinning profit

Whitman's brush with what grew into a political controversy came during the Internet boom and bust cycles in Silicon Valley, between 1998 and 2002. It involved a financial practice called spinning, which was legal until 2003.

Major brokerages allocated shares of hot IPOs (initial public stock offerings) in technology companies to top executives at other firms.

Investment firms used "spinning" frequently during the Internet boom. It involved offering a company's executives and board members personal shares in IPOs as a reward for giving the investment firms corporate business. Investment firms initially denied that was their motive, but later agreed to ban the practice.

The firms offered key executives shares at starter IPO prices not then available to ordinary retail investors. The executives resold their shares within days, making millions.

After Wall Street whistleblowers exposed the practice, small investors and state and federal lawmakers were outraged.

Whitman was accused of spinning because of her dealings with investment giant Goldman Sachs of New York, one of the oldest Wall Street investment firms.

As eBay's chief executive in 1998, Whitman had hired Goldman Sachs to help take her company public through an initial public stock offering on Nasdaq.

A year later, eBay used Goldman Sachs for a second stock issue and the firm was hired again to advise eBay as Whitman led a takeover of PayPal in 2002.

For all of those services, eBay paid Goldman $8 million.

Starting in 1998 and through at least most of 2002, Whitman also was a private banking client of Goldman Sachs.

During that time, Goldman allocated to her between a few hundred and a couple of thousand shares in more than 100 hot dot-com IPOs, at the starting price. As the stocks surged, Whitman sold her shares, making a $1.78 million profit, she later acknowledged.

Whitman insisted then that the practice was common and legal, and continues to maintain she did nothing improper, said Henry Gomez, a former eBay executive who is now her senior campaign spokesman. Whitman declined to be interviewed by The Bee.

Shapiro, the New York professor, and federal and state lawmakers saw the stock deals rather differently. "A quasi-kickback," Shapiro told The Bee in a recent interview.

Fellow eBay executive Steve Westly, who later became state controller and ran for governor, also was accused of making $1 million by spinning IPO trades through a rival brokerage, Robertson Stephens, that also did work for eBay.