By Jon Ortiz
jortiz@sacbee.com
Published: Wednesday, Apr. 28, 2010 – 12:00 am | Page 1A
Last Modified: Wednesday, Apr. 28, 2010 – 8:05 am

While Congress ripped into investment giant Goldman Sachs executives on Tuesday, the scandal threatened to tear the scab off a political wound in the California governor’s race.

Republican front-runner Meg Whitman tried again to put her prior relationship with the bank behind her, telling the Associated Press she regrets taking part in a now-banned stock sale practice involving the firm and that she left its board after 15 months because it “wasn’t a good fit.”

But her remarks only provided ammunition to political foes seeking to remind voters that Whitman, a former Goldman Sachs board member, has a past with the investment firm now under scrutiny for its role in the national financial crisis.

Steve Smith of the California Labor Federation, which represents a coalition of more than 1,200 unions, said in an e-mail that Whitman’s remarks were “dumbfounding” and that while “she’d like to sweep her dealings with Goldman under the rug, the evidence points to a close, lasting relationship that continues to this day.”

Sterling Clifford, spokesman for Democratic Attorney General Jerry Brown’s gubernatorial campaign, asked, “Does she regret it because it was wrong or because it’s become an issue in her race for governor?”

And Jarrod Angen, communications director for Whitman’s Republican rival, Insurance Commissioner Steve Poizner, said, “I’m sure there are several convicts that regret their crimes, but it doesn’t make them any less guilty.”

Whitman hasn’t been named in the latest Goldman scandal. Senators are investigating charges that the firm fraudulently profited from betting that subprime mortgage securities would fall in 2007 while also selling those same vehicles as profitable to investors. Still, the new charges have once again drawn attention to Whitman’s connection with Wall Street’s biggest investment firm.

She sat on Goldman’s board from October 2001 to December 2002, a job that paid the equivalent of $475,000 in cash and stock options.

Before that, she had hired Goldman in 1998 to help take eBay public. She tapped the firm again for a second eBay stock offering and then to advise on a takeover of online biller PayPal in 2002.

During that same period, Whitman also was a personal banking client of Goldman and engaged in “spinning,” a now-banned practice in which the investment bank gave her first crack at buying shares of companies going public. When the shares became widely available – and their prices soared – the stock was sold for a quick profit.

Spinning was permissible then; Whitman made $1.78 million from it.

“Such investment opportunities were common at the time,” Whitman said in an autobiography released this year, “and I had never seen anyone in the government, the media, or anywhere else raise the idea that this practice was a conflict of interest.”

In 2002, Congress looked into spinning. A year later, the Securities and Exchange Commission banned it. “I supported those changes,” she said in her book.

Whitman told the Associated Press on Tuesday that she stepped down from the board position because it “wasn’t a good fit.”

Her spokesman, Henry Gomez, gave The Bee another reason last year: He said she left Goldman to focus on integrating PayPal into eBay. But within a month she had taken another board appointment, at Procter & Gamble.

What’s clear is that the same day she left the Goldman Sachs board, the government announced a $1.4 billion settlement with Goldman and nine other firms that included a ban on stock spinning.

Meanwhile, eBay shareholders sued their CEO for conflict of interest. Although she maintained she got the inside trading track only because of her personal banking relationship with Goldman, Whitman and two other eBay executives settled the suit in 2005, admitting no wrongdoing.

David Shapiro, a City University of New York professor who studies financial fraud and corruption, noted that financial scandals earlier this decade led the government to enact sweeping new reporting rules, including a requirement that publicly held companies disclose their codes of business conduct and ethics.

At eBay, the code includes: “The best rule for any conflict situation is ‘disclose and abstain’ – if it is not possible to avoid participating in the outside activity creating the conflict, be open and honest with eBay about the possibility of a conflict and avoid participating in eBay decisions that might raise the conflict.”

Goldman Sachs has a similar rule.

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