Still No Accountability: An Update On The Goldman Sachs Facebook Deal
The New York Times’ DealBook broke the story of Goldman Sachs’ investment in Facebook on January 2, 2011. The story was based on a leak and included Goldman Sachs’ plans to sponsor a private placement of private company Facebook’s stock with Goldman’s very special, very private, high-net-worth clients. As you would expect, the story generated a lot of media interest, despite its timing so close to the New Year’s holiday.
Such an appetite the media has for good news, the next big thing, any reason to believe the stock market will recover and, therefore, the economy at large in a big way, very soon!
And, as you would also expect, I was interested in the story for Forbes because, like the story of the GM IPO, the Facebook offering raised issues of transparency and disclosure of “true and fair” financial information. The story also exposes the willingness, once again, of a certain segment of the investing population to ignore the lack of verifiable financial information when offered a “hot” or “exclusive” opportunity.
General retail investors were locked out of the GM IPO and, as I wrote then, I think it’s just as well. Since the GM IPO on November 18th, that stock has traded within a fairly tight range compared to the expectations that were voiced at the time.
The Facebook private placement has been a media mainstay since January 2. Each day a new tidbit is released. Personally, I’m trying to find out which Big 4 firm or firms are working with Facebook to prepare for the inevitable, it now appears, IPO next year. I’ve asked around, and around – to hedge fund executives, professionals from firms that may be in the right place, and others in the Silicon Valley technology realm. They either claim they do not know or sheepishly admit they do not care which, if any, auditor is assigned. Reuters eventually reported that the disclosures provided to Goldman Sachs’ chickens, I mean clients, meant to entice them to make a $1 million minimum investment, included only unaudited results.
When it comes to hot, exclusive investments, there’s a class of investors that is willing to, actually prefers to, look the other way at inconsistent or missing financial details. They continued to look the other way even when it was disclosed that another Goldman Sachs business unit had passed on the same deal for its clients.
I talked about this “see no evil, hear no evil…” investment philosophy in another piece at Forbes, “Looking For A Great Investment? Try A Ponzi Scheme!” Some investors have portfolio ADD. They’re in for the selfish, self-serving, short pop. There’s a word for that: hot money. Instead of limiting itself to the world of securities lending, repurchase agreements, and overnight paper, hot money is playing in the realm of equity investing. It works better if you don’t know what you don’t know rather than if you do know what you don’t know.
It’s totally no fun if you end up knowing what you should have known earlier.
This week the Goldman Sachs Facebook deal fell apart. Sort of. Due to the extensive media coverage of the details, in particular before they were final, Goldman Sachs was running some really big regulatory risks related to general solicitation of potential shareholders.
The explanation of what happened – Goldman Sachs will now limit the offering to only foreign investors – is included in a fairly legalistic essay by Steven Davidoff, “The Deal Professor” at the The New York Times. It’s called, “Why Did Goldman Blink,” although I might have added the subtitle, “Or, How Did A Huge Speck of Dust Fly Into Goldman’s Eye, Obscure Their Usually Impeccable Vision And Who’s Crying Now?”
I’m still looking for the name of Facebook’s audit firm. I’ve contacted the company more than once but no response. If anyone knows who it is, please get in touch at fmckenna at mckennapartners dot com.
Here’s an excerpt from what I wrote about the proposed deal on January 4th. Read the rest in my column at Forbes, Accounting Watchdog.
Facebook wants the public’s money – and their trust – with none of the disclosure and none of the regulatory scrutiny of a public company. Goldman Sachs’ strategy to raise $1.5 billion for Facebook from “sophisticated investors” and invest another $450 million of their own money is an example of wanton disregard for accountability to the securities markets. But it’s more a function of Facebook’s “have your cake and eat it too” attitude towards the markets than any subterfuge on Goldman’s part. The investment bank and Facebook’s lawyers get paid to make their client happy…
So let’s summarize Facebook’s strategy of being a private public company from the perspective of the investor:
- Facebook limits access to their financial information.
- Goldman will manage the SPV used to market “shares” of Facebook to outside investors. Goldman has access to Facebook’s books but your access is through Goldman.
- Facebook likes to say they have $2 billion in revenues but who is testing the quality and veracity of those revenues? Advertising revenue is one thing – although notoriously easily manipulated from an accounting perspective as we saw in the Time-Warner case. But “transaction revenue” from equally opaque companies such as Zynga is like cotton candy – potentially all fluff.
- Facebook’s CEO wants absolute control of the company so he can “realize his vision.”
- Facebook thinks regulatory control over the securities markets, accounting requirements that protect investors, and legal compliance with these laws and regulations is a “distraction.”
- Facebook’s CFO is not an accountant, not a CPA, and has no public accounting experience. What’s wrong with that? It may be barely tolerable when a company is in startup mode, but this is a big global company that has to be run, run well, and run according to GAAP.
- Facebook has no requirement to have independent directors on its board who protect the interests and rights of this growing class of outside investors. Oh, wait… Goldman Sachs can look out for them.
- Facebook has no requirement to be audited as long as it’s a private public company. It’s notoriously difficult for outsiders to find out who their service providers are – the audit firm or consultant that’s currently reviewing financial and IT controls over the production of financial reporting for investors. Given the amount of outside investment, I’m sure one of the largest global audit firms is advising them. But their reports, and any concerns they may have about controls or corporate governance, are not public nor do they go to the SEC. Facebook is not subject to Sarbanes-Oxley including whistleblower and CEO/CFO certification requirements. Given estimates of Facebook’s “valuation” and expected market capitalization post-IPO, isn’t it a good idea to make sure they’re ready for prime-time?
The television show Saturday Night Live has a running parody of Wikileaks’ Julian Assange. One segment has the Assange character commenting on the recent announcement of Facebook CEO Mark Zuckerberg as Time Magazine’s person of the year:
“I give you private information on corporations for free and I’m a villain. Mark Zuckerberg gives your private information to corporations for money and he’s ‘Man of the Year.’”
If only the joke wasn’t on the investor.
“It works better if you don’t know what you don’t know rather than if you do know what you don’t know. It’s totally no fun if you end up knowing what you should have known earlier.” – Phew! Shades of Taleb?!
From another perspective, a better analogy of the behavior of Goldman and its prospective investors may be Gandhi’s ‘three monkeys’ who “See no evil, hear no evil and speak no evil” (that is, till they lose the shirts on their own backs!).
Wow. You have hit the nail on the head. I am being solicited to invest in two of these limited partnerships. I agree with you, it is an extremely risky venture. Sometimes if it sounds too good to be true it usually is.
Keep up the good work.
I see it as a very unfair dealing with US investors since the company was bailed out by the US. How can they prevent them from participating in this partnerships?