Goldman Sachs fraud accusations jolt California political races

The decision by federal regulators to accuse investment powerhouse Goldman Sachs of fraud for actions in the run-up to the market meltdown sent shivers through Wall Street and a jolt of uncertainty into an unlikely venue: California’s political races.

In something of a rarity, both top-of-the-ticket races — the contests for governor and U.S. Senate — feature competitors from the world of business. Former Hewlett-Packard Chief Executive Carly Fiorina is running for the Republican nomination to challenge incumbent Democratic Sen. Barbara Boxer. Former EBay chief Meg Whitman is the GOP frontrunner in the race for governor, where she would likely face Democrat Jerry Brown, the former governor trying to recapture the job he held from 1975 to 1983.

Of the two, Fiorina has had a rougher road so far, both because of her business record and her comparatively paltry campaign bank account. Democrats, and Republicans as well, have made much of her rumbly tenure at the electronics giant, one marked by mass layoffs, the outsourcing of jobs to foreign lands, feuds with the founding families and, ultimately, a firing cushioned by a send-off worth up to $42 million. Saving her money for the end of the race, she has done little in the way of large-scale repair work and remains only marginally known in this, her first race for political office.

Whitman’s campaign has been the polar opposite, a disciplined behemoth. Fueled by $59 million of her own money and additional outside fundraising, the campaign has blanketed the state with television ads and, lately, a glossy, newsweekly-style magazine. A 30-minute campaign infomercial has begun airing. Last week, Whitman raised money across California with party heavyweights including former secretaries of State Condoleezza Rice and George Shultz, former presidential candidate Mitt Romney, Sen. John McCain of Arizona and former Florida Gov. Jeb Bush.


If there was any shadow in the week, however, it was the Securities and Exchange Commission’s action and the simultaneous Democratic push to tighten regulations on Wall Street. Both Fiorina and Whitman have a message with a subtext: that they will bring tough business practices to bear on an unruly and inefficient government. The actions, if they persist in the public eye, threaten to remind voters that no matter how off-putting they find government, business may not always provide the perfect template either.

In Whitman’s case, there may be more potential for distraction. Her career at EBay was closely entwined with Goldman Sachs; she served on its board and has already weathered one controversy over special favors given to her by the investment firm.

In past years, candidates experienced in the business world have foundered in political races for two reasons: They made rookie mistakes in their first big runs for office, and their business records were held up to a populace that recoiled. California voters almost always have decided they had more in common with the workers laid off than the executive who left with a golden parachute.

Whitman has avoided those shoals so far because she captained EBay at a period of explosive growth when most of the news was good. Beyond that, however, her business career has been spent in companies whose products are identifiable by the public — places where your neighbor sells excess belongings, you order flowers for your spouse and shoes for your children and find movies the whole family can see, unembarrassed.


“My sense is that my business background is a positive because EBay is a Main Street company, right?” she said in an interview last week. “It became a platform for small businesses. I mean, everyone you know uses EBay, so it’s very much a Main Street company. I worked for the Walt Disney Co., for Stride Rite, for FTD. I worked for companies that people know, they used the products — Procter & Gamble. So I think that business experience is a benefit.”

Still, tellingly, Whitman glossed over her relationship with Goldman Sachs, specifically her departure from its board in 2002 after little more than a year.

“I actually stepped down because I didn’t feel like it was a good fit,” she said. “I’m more a Main Street CEO than a Wall Street denizen.”

Actually, however, she left under much more troubled circumstances. In late 2002, Congress was investigating Goldman Sachs’ practice of letting executives buy shares before they were traded. Allegedly, Goldman in exchange got access to investment banking business with the companies the executives led.


Whitman received shares in more than 100 Goldman-sponsored stock offerings before the investigation became public. That October, EBay stockholders sued the company and its executives, including Whitman, arguing that the executives had improperly benefited from the sales of the stock in the Goldman Sachs offerings.

In December 2002, Whitman resigned from the Goldman Sachs board; her spokesman said she did nothing wrong but wanted to avoid the perception of a conflict. The same day, the SEC and investment banks announced a settlement that banned the practice in which Whitman and others had taken part.

The shareholder lawsuit was later settled, with Whitman reportedly paying back to EBay nearly $1.8 million in profits from the stock sales.

Republicans have made strides this year, even in California, where they are perennially outnumbered, by arguing that Democrats have presided over an unleashing of government. Democrats are now pushing back with the notion that Republicans are seeking to protect the Wall Street firms that brought the nation to the economic precipice. That thrust threatens to, at the very least, offset the advantage that the business candidates hoped would be theirs in a year marked by animosity toward government.


In the interview, which took place after she met with voters in the City of Industry, Whitman was asked whether the perks she enjoyed might make her a tougher sell to voters. She referred again to the companies for which she has worked, noting that at “almost every event now there’s EBay sellers who come.”

“And so I think people will look at the EBay experience and they will say, ‘Gosh, you know, Meg was involved with Goldman Sachs in some way but my sense is that she’s a Main Street executive [who] understands what it’s like to run a small business,’ ” she said. “You will not find a stauncher advocate for small business than me, and that’s what’s going to lead California out of this recession.”

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