A lucrative Goldman Sachs deal, a Craigslist battle and personal investments raise questions.
In her autobiography, Whitman disavows Wall Street “self-dealing and fraud” and rejects as myth the idea that successful executives must “step on people, stretch the truth ... and make heartless decisions based only on the bottom line.” (Paul Sakuma, Associated Press / April 23, 2010)
By Evan Halper and Jack Dolan, Los Angeles TimesMay 12, 2010
Reporting from Sacramento
Meg Whitman says she became one of the world's wealthiest CEOs by always asking, "What is the right thing to do?"
In her recently released autobiography, the front-runner for the GOP gubernatorial nomination disavows Wall Street "self-dealing and fraud" and rejects as myth the idea that successful executives must "step on people, stretch the truth . . . and make heartless decisions based only on the bottom line."
Several of Whitman's actions while in corporate office and as an investor, however, raise questions about whether her conduct has squared with the image she has created in the book, on the stump and through tens of millions of dollars' worth of campaign commercials. Her ethical compass was tested repeatedly as she went from young Harvard MBA to chief executive of the online auction giant EBay, and some shareholders, regulators and business partners found it wanting.
A lucrative deal that Whitman cut for herself with investment banking giant Goldman Sachs was called "corrupt" by the U.S. House of Representatives Financial Services Committee. The partnership she forged between EBay and online rival Craigslist landed in court and is still there; Craigslist has accused EBay of stealing trade secrets and fraudulent advertising. At another company, her dismissal of a subordinate executive resulted in an age-discrimination lawsuit and a secret court settlement.
As an investor, she put millions of dollars into private equity firms with a reputation for callous business practices. Subsidiaries of one of the "distressed asset" firms in which she identifies herself as a limited partner foreclosed on dozens of victims of Hurricane Katrina.
"It's nice to say if you just behave ethically, you will make profits," said Meir Statman, a professor of finance at Santa Clara University who focuses on ethics. "If that were true, life would be really easy. But . . . there are tradeoffs. And if you are a politician, you have to account for them."
Whitman declined to be interviewed, referring questions to her campaign staff.
Her business practices came under intense scrutiny in the fall of 2002, when congressional investigators identified her as one of a handful of corporate executives who had made self-serving deals with Wall Street firms at the expense of shareholders.
After Whitman hired Goldman Sachs to handle EBay's investment banking business — deals that generated $8 million in fees for the bank, court records show — Goldman gave Whitman early access to initial public offerings of stock for her personal portfolio. The head start on the rest of the market allowed her to sell shares for a profit of $1.78 million.
The deals raised suspicions among regulators that Whitman and other executives, including Kenneth Lay of Enron, were trading shareholder assets — in the form of fees paid to investment banks, for example — for personal gain.
"It is effectively a bribe for future services," said Mercer Bullard, a law professor at the University of Mississippi and former Securities and Exchange Commission attorney who was not involved in the government investigation. "It was exactly the kind of thing crooked politicians engage in."
Goldman Sachs and nine other Wall Street firms agreed to stop giving executives they do business with early access to public offerings as part of a settlement with regulators in 2003. Whitman writes in her book that there was nothing illegal about the transaction and that "such investment opportunities were common at the time."
In a debate last week with her primary election opponent, state Insurance Commissioner Steve Poizner, Whitman said she "did not actually see a conflict of interest" in the deal. "It was a completely separate account that had nothing to do with EBay's banking business," she said. "But the truth is leaders have to be above reproach."
Whitman, who had joined the Goldman Sachs board in October 2001, resigned from it two months after she was named in the congressional investigation. She paid $1.78 million to settle a subsequent lawsuit brought by EBay shareholders who said the money she made on the stock deal belonged to them, not her.
She has since worked to restore her reputation, devoting substantial time and resources to charitable efforts. Her book says that in the aftermath of Hurricane Katrina, EBay dropped $1,000 credits into the accounts of 1,000 customers in New Orleans.
"It was the best million dollars we ever spent," she wrote.
Sometimes, however, the way she has managed her family's personal investments has contrasted with such efforts.
A disclosure of economic interests that the state requires of candidates shows that Whitman's family has placed at least $2 million in Fortress Investment Group, a private equity firm that gained notoriety a few years ago when subprime lenders it owned foreclosed on homeowners, including at least 34 Katrina victims.
In a written statement, Whitman campaign spokesman Tucker Bounds declined to specify how much the candidate has invested in Fortress. Her disclosure form, which she filed March 11 and which covers the previous 12 months, notes two investments exceeding $1 million; the state does not require more specificity.
As a limited partner in the fund, "Meg has no control or influence over investment decisions," Bounds wrote. Asked in April whether she knew about the Katrina foreclosures, he responded, "No."
The firm's investments created unwelcome headlines in 2007 for Democratic presidential candidate John Edwards, who had worked for Fortress for 14 months and had $16 million invested in the firm. Edwards ultimately renounced Fortress, divested his holdings and created a charity to help the Katrina victims who were foreclosed upon.
Whitman is a limited partner in more than two dozen other secretive hedge fund and venture capital investments, some of which have been accused by regulators, scholars and activists of questionable business strategies. The Whitman family portfolio includes, for example, at least one fund that sought profits from the bankruptcies of American automakers and another that is partly owned by the government of Abu Dhabi, which has been cited for human rights abuses by U.S. officials and advocacy groups.
Whitman has said she is a passive investor in these businesses and cannot be held responsible for what they do with her money. But some experts disagree.
"You are on the hook for what you own," said David Wood, director of the Initiative for Responsible Investment at Harvard University. "It is a dodge to say, 'There is no way I could possibly monitor all these investments.' "
One investment that Whitman has taken ownership of is the $1.15 million she contributed to stop the development of a 572-acre property near land she has in Telluride, Colo. The money helped the city use its power of eminent domain to force the owner to sell.
Neal Blue, a San Diego defense contractor, bought the pristine land adjacent to small, wealthy Telluride for $6 million in 1983. Years later, he began moving on plans to build condos and shops on the land. Local preservationists and affluent landowners, including Whitman, protested.
To stop Blue's development, the town expanded its border in 2001, annexing his property. Litigation ensued. The courts ruled that Blue could be forced from his land in exchange for $50 million.
Whitman, in addition to pitching in the $1.15 million, "rallied friends around the country to the cause," according to a May 2007 news release from the nonprofit Valley Floor Preservation Partners. Property-rights advocates — whose views she claims to share unequivocally — said Telluride was engaging in an unconscionable abuse of government power.
Blue, who is now 75, "didn't appreciate a fellow Republican, somebody who supposedly stands up for property rights, being at the forefront of the effort to take away his land," said his attorney, Thomas Ragonetti.
Bounds said Whitman "simply supported a community fundraising effort" and was not involved in the eminent domain proceedings. Whitman asserted in an October interview on the conservative blog Flash Report that "people's property rights absolutely need to be respected" and they are "a core part, I think, of why people live in America."
As Whitman celebrated the 2007 victory in Colorado, her EBay shareholders had little to cheer about. The stock price was in decline. It had peaked at the end of 2004 and had lost more than half its value by the time Whitman announced her departure from the company in January 2008 amid talks with top Republicans about a possible run for California governor.
Some of her boardroom moves in the final years of her decade-long EBay tenure rankled investors.
Eric Jackson, a hedge fund manager and shareholder activist who analyzed EBay's SEC filings for the online financial publication TheStreet.com, found that Whitman's take from salary, bonuses, stock awards and other perks jumped nearly fivefold, from $2.9 million in 2004 to $13.9 million in 2007. Costs to shareholders from her use of the company jet soared, the filings show; she spent more than $1 million on the plane in 2006 alone. In addition to her work travel, she charged EBay shareholders nearly $300,000 for flights to attend board meetings for other companies.
Bounds said the private jet travel was "instrumental in growing EBay from a start-up company to an $8-billion global corporation." He added that most of Whitman's personal fortune, which has been widely estimated at more than $1 billion, did not come from salary or stock grants received in her later years with the company, some of which she never redeemed.
"Meg earned her money because she had an early ownership stake in EBay and grew the company into a huge success," Bounds said.
Another product of Whitman's EBay years continues to dog the company. EBay is locked in dueling lawsuits with Craigslist.com, perhaps the world's best-known classifieds website, whose owners accuse EBay of stealing their proprietary financial information to launch a competing website.
The seeds of the dispute were sown in 2004, when EBay bought about a third of Craigslist. Founder Craig Newmark and Chief Executive Jim Buckmaster were wary of what a profit-driven, mainstream corporation might do to their proudly low-budget website. They signed the deal, according to Buckmaster's December 2009 testimony in a Delaware courtroom, after Whitman gave her "personal assurance" that EBay would "gracefully unwind" the collaboration if anyone became uncomfortable with the partnership.
That discomfort arrived with a shock in the summer of 2007, when EBay announced the U.S. launch of a classified ad site — Kijiji.com — designed to compete directly with Craigslist.
Buckmaster said in court that he demanded Whitman sell EBay's share of Craigslist. He didn't want a competitor on the board with access to his company's most sensitive financial data and Web traffic statistics.
Whitman testified that she refused to sell. But she assured Buckmaster in an e-mail that her company, "with the emphasis our culture places on integrity," had taken steps to protect Craigslist's trade secrets from the Kijiji team. Whitman later acknowledged in court that she had no idea what steps EBay was taking when she made her assurances.
"The firewall would have lived at a much lower level," she testified in the lawsuit that EBay filed against Craigslist. That suit accuses the smaller firm of violating its shareholder agreement with EBay through actions that Craigslist executives say were necessary to protect trade secrets. They included diluting EBay's stake in their company enough to remove EBay from the board.
Craigslist countersued, accusing EBay of unfair competition and false advertising for, among other things, buying ads on search engines that invited users to clickhttp://www.craigslist.org. But the link took customers to EBay's new site instead.
Without acknowledging any role in buying the ads, Whitman testified that she didn't think they were deceptive or even particularly unusual.
"This didn't completely surprise me," she added. "I mean, this is sort of typical. . . . When you actually type in 'Meg Whitman for Governor,' guess who has bought the keywords next to Meg Whitman for Governor? My gubernatorial opponent."
Bounds declined to answer specific questions about the ongoing litigation.
The tolerant attitude Whitman displayed on the witness stand in December contrasts with her actions in 2008, when she sued an independent entrepreneur for trademark infringement and "political cyberfraud" after discovering that he had registered several potential Whitman campaign Web addresses, including whitmanforgovernor.com, megwhitmanforgovernor.com and Meg2010.com.
Her complaint demanded hundreds of thousands of dollars in damages and an advertising campaign, funded by the entrepreneur, to "correct any consumer confusion or misperceptions." She took her case to a United Nations arbitrator in Switzerland — where she lost — before signing a secret settlement.
Earlier in her career, she ended another court case with a secret settlement after being sued, at age 39, for age discrimination.
In December 1995, eight months after Whitman took over as chief executive of the flower delivery service FTD, she fired her 55-year-old technology chief, Dave Carlson. She replaced him with a man almost two decades younger, according to the lawsuit Carlson filed in a suburban Detroit court near FTD's headquarters.
Whitman told some staff members that the company was too "old and stodgy," Carlson alleged. He also said she told a conference room full of senior managers: "We need about 15 killer young executives."
FTD's vice president of government affairs interrupted, telling Whitman that she didn't mean to use the word "young," the complaint said. "Actually, I do," Whitman allegedly replied, "but I get your point."
Carlson declined to comment because of the confidentiality agreement he signed to settle the case. Whitman's attorney denied Carlson's allegations in his response to the lawsuit.
Bounds said in his statement: "Suits of this nature filed against executives of major companies are commonplace today. Too often they are frivolous and in no way reflect the true performance of management."
evan.halper@latimes.com
jack.dolan@latimes.com
This begins a series of articles examining the backgrounds of the major candidates for California governor and U.S. Senate in the June 8 primary election.
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