The original private placement dealGoldman Sachs attempted for Facebook angered or annoyed many of the firm's wealth management clients.
The firm initially opened participation in the deal to all of its wealth management clients, requiring only that they contribute a minimum of $2 million. The high level of client interest, however, meant that Goldman would have to turn away many would-be investors—a prospect that wealth management professionals at Goldman dreaded would spur some clients to walk away from the firm altogether.
"In terms of client relations, it was a nightmare," a person familiar with the matter said.
There's a certain luster to being a Goldman wealth management client. It conveys bragging rights because it is perceived as an exclusive club with certain advantages, including the ability to participate in deals that only Goldman can strike. Shutting out clients from a high-profile deal like Facebook could lead some investors to feel slighted.
The situation was made more complicated after the deal began to draw attention from the media. Goldman lawyers devised an awkward set of rules intended to comply with SEC prohibitions on general solicitations for private placements. One rule was that if any client asked about Facebook before it was brought up by Goldman's wealth management sales team, that client had to be turned away from the deal.
To avoid this, wealth managers at Goldman found themselves racing to mention the deal to every important client before the client brought it up independently. This left the impression with some clients that the firm was pushing hard to win investors for the deal, when the reality was that the deal was always bound to be over-subscribed.
"The problems could have been avoided if we had just set a higher minimum investment," the person said.
By setting a higher minimum investment, the firm would have excluded many clients without risking alienating them.
The change to exclude all US clients, allegedly to comply with SEC rules, accomplished much the same result, the person said. While some clients were annoyed they could not participate, the firm was able to redirect any outrage toward the government. Foreign clients are said to be pleased that they were able to get much higher allocations in the deal.
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