On March 16, he replied to Rosenzweig in preparation for a meeting he was having with him and other university officials that day: “Goldman, Sachs’ discriminatory employment practices are symbolic of the injustices and discrimination Blacks have faced and continue to face. Although many Whites profess in their public life to denounce discrimination and urge equal treatment and opportunity for Blacks, their actions clearly indicate that they are racist.” Cofield wrote that he would welcome the opportunity to discuss with Levy “the elimination of Goldman, Sachs’ discriminatory employment practices” and invited him to Palo Alto “as soon after March 30th as possible.” Without that discussion, he wrote, “we” would have “no choice” but to decide among four choices: that there be “an immediate cessation of all recruiting activities” by Goldman at Stanford; that Cofield sue Goldman privately; that he sue Goldman through the Justice Department based on equal employment statutes; or that a “sanction and redress” be undertaken by the New York Stock Exchange against Goldman.
During the meeting, Rosenzweig read Cofield’s memo over the phone to Krimendahl. Stanford also sent a copy of the memo to Goldman in New York. On April 6, Krimendahl wrote to Cofield that Goldman now believed “it would be fruitful to hold further discussions with you relating to employment with our firm.” Krimendahl offered Cofield an all-expense-paid trip to New York “at your earliest convenience” to “visit with members of our Buying Department as well as various partners of the firm.” Cofield did not respond to Krimendahl’s letter.
On April 27, Cofield filed a charge of discrimination against Goldman with the EEOC based on his February 20 interview with Jamison. He also filed a five-page affidavit that described what had transpired during the previous nine weeks. On June 10, Stanford’s general counsel sent Jamison a letter—again misspelling his name—describing that Stanford’s president had asked that a study be conducted “to ensure that firms and companies which recruit here do not discriminate in hiring” and that in the “course of that study … the issues raised by Mr. Cofield will be considered fully.” He wrote that pending the outcome of the study Goldman would be barred from recruiting at Stanford, a ban that lasted five years. “There’s not much more that Stanford could have done,” Cofield said in a recent interview.
After graduating from Stanford, Cofield moved to Boston to take a job at Arthur D. Little & Co., the management consultants. One day, he got a call from Dick Menschel, whom Jamison had cited as the partner who raised the objection to Cofield’s hiring, inviting him to dinner to talk “on a personal basis [about] what he thought were misunderstandings regarding Goldman Sachs.” On August 17, Cofield filed a complaint with the New York State Division of Human Rights against Goldman, as well as, individually, Levy, Whitehead, Jamison, and Krimendahl, charging them with “unlawful discriminatory practice relating to employment by refusing to hire him because of his race and color.” On August 28, Menschel and Cofield dined together at Locke-Ober restaurant—one of the toniest in the city—and Menschel assured Cofield he was not prejudiced against blacks and that Jamison had gotten it wrong. “Goldman Sachs does not have discriminatory hiring practices,” Menschel told him. He also said he did not think Jamison was “a bigot” and that what Jamison said was not “a representation of his own views either.” But the discussion steered clear of the actual words Jamison had used in the February 20 interview. A day earlier, Goldman would later claim, it offered Cofield a job—“a definite job offer,” the firm said. Cofield denied any such offer had been made. On October 16, though, as part of “an investigatory conference” at the New York State Division of Human Rights, Goldman made “a definite offer of employment” to Cofield.
On December 16, 1970, the EEOC’s acting district director in New York “found reasonable cause to believe” that Cofield’s charges against Goldman were true and found “no concrete evidence to support Goldman’s claims that it had ‘actively recruited for executive personnel among minority groups as indicative of their commitment to the objective of providing equal employment opportunity to all qualified persons.’ ” There was an effort made at the end of December to settle the New York matter through a “proposed conciliation agreement” that included the agreement that Goldman would hire Cofield in Krimendahl’s department.
But on January 16, 1971, Cofield rejected the settlement because he claimed he was never offered a job. “It is the practice of most firms to put an offer for employment in writing,” he wrote. “This they have not done.” He also objected to the settlement because there were no provisions in it to increase “the number of Black and other minority group employees in professional and executive positions.” On June 16, the EEOC gave Cofield permission to bring a civil suit against Goldman in U.S. district court and told him he had thirty days in which to do so. If he failed to file, he would lose his right to sue. On July 2, the EEOC as a whole adopted the finding of the New York district office in Cofield’s case and encouraged both Cofield and Goldman to “make proposals” on how to settle the matter. On March 6, 1972, Cofield and his lawyer, Clarence Dilday, of Owens & Dilday, in Boston, filed a suit against Goldman.
In the suit, which had the blessing of the Equal Employment Opportunities Commission and the New York State Division of Human Rights, Cofield sought a finding that Goldman violated the law and would be enjoined from doing so again. He also sought $100,000 personally and another $1 million from Goldman on behalf of other plaintiffs—the suit was given class-action status—“who might suffer from the firm’s alleged discriminatory practices.” But Cofield had filed the suit too late. On September 12, 1972, the U.S. District Court of the Southern District of New York found no “just cause for the delay” and dismissed Cofield’s suit against Goldman.
Before the ruling against him in September, Cofield had taken the story to the Wall Street Journal, figuring he had missed the deadline and could not prevail. James Gilmour, Goldman’s personnel manager, said the incident was a misunderstanding. “Somehow or other he felt we discriminated in our recruitment of college grads,” he told the paper. “We tried to tell him that wasn’t the reason and we’ve taken in blacks before.” Gilmour said Cofield had wanted a job involving “risk capital,” so the firm suggested he might have a better chance getting such a job somewhere else.
Cofield’s brother, a student at Wharton at around the same time that Cofield had graduated from Stanford, remembered being at a Goldman Sachs recruiting event with John Whitehead, then on Goldman’s Management Committee, when another student, who happened to be black, asked Whitehead about the incident with James Cofield at Stanford. Whitehead, who was busy touting Goldman’s virtues to an eager audience, was left speechless by the question. In 1971, Goldman established the Goldman Sachs Fellowships at Harvard Business School, awarded annually to outstanding minority-group students.
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DESPITE THE MISDIRECTION provided in the Times article, the Goldman partners were immensely fearful of what the potential consequences of the growing Penn Central lawsuits might be. “There was real fear that the liability for the Penn Central could put the firm under …,” Rubin explained. “People were really deeply worried that the firm and their net worths were going to be gone. They were surprised by the dangers lurking in the firm’s commercial paper business. They weren’t traumatized, but they were deeply worried. Deeply worried.” Rubin elaborated in his book: “As a private partnership, we faced unlimited liability, and some people worried whether the firm would survive.” In his memoir, Whitehead echoed Rubin’s concerns. “It was scary for all of us, because the total claims at one point exceeded the firm’s capital, and the partners would be personally liable for the remainder in the unlikely event that all the suits went against us.” To try to provide some comfort, Sullivan & Cromwell wrote a letter to Levy that it didn’t think the payments that Goldman would likely have to make to Penn Central’s commercial paper creditors would “impair” Goldman’s capital. “Gus carried it in his jacket pocket as a kind of talisman,”
Rubin wrote.
A comprehensive, eight-hundred-page report by the U.S. Securities and Exchange Commission, released in August 1972, made clear what Levy, Rubin, and their partners were so worried about. According to the report, not only had Goldman puts its own interests before those of its clients, but it had also continued to sell Penn Central’s commercial paper to investors after learning that the company was in dire financial straits. The allegations were devastating, especially for a firm anxious to portray itself as in the vanguard of Wall Street. “Goldman Sachs continued to sell [Penn Central’s] commercial paper after [it] had received information about the financial condition of the [company,] which should have raised serious questions as to the safety of an investment in the company’s commercial paper, and Goldman, Sachs did not disclose such information to its customers,” according to the report. “The information which Goldman, Sachs received should have put [it] on notice that a thorough examination of the financial condition of [Penn Central] would seem appropriate in order that [it], and through [it, its] customers would be apprised of the current position of [Penn Central]. Despite these warning signs, Goldman, Sachs made no meaningful investigation. Such an examination would have disclosed that the financial condition of the company was more serious than had been revealed to the public.”
From the time the Interstate Commerce Commission, or ICC, authorized Penn Central to sell its commercial paper to investors, in July 1968, to the company’s bankruptcy nearly two years later, Goldman had been the sole underwriter of the company’s commercial paper. By the end of 1969, Goldman had sold $200 million of Penn Central’s commercial paper. By the first half of 1970, the $200 million outstanding had been reduced to $83 million, held by seventy-two Goldman customers who had purchased the paper between November 1969 and May 1970. “As commercial paper is universally believed to be a very low-risk security, these customers were shocked to learn, prior to the maturity date of their paper, that the [Penn Central] had filed a petition in bankruptcy [court],” according to the SEC report. “Penn Central has repaid none of this indebtedness, and there is little likelihood of repayment.”
Goldman’s relationship with Penn Central originated with Levy’s twenty-two-year friendship with David C. Bevan, Penn Central’s longtime chief financial officer. By March 1968, months before the ICC approved Penn Central’s application to issue commercial paper and after a round of meetings among Bevan, Levy, and Wilson, Goldman’s head of commercial paper, Penn Central decided to hire Goldman to sell its commercial paper to investors.
According to Wilson, Goldman “followed its usual procedures for taking on a new issuer” but, apparently, these procedures did not include preparing any written reports about Penn Central’s creditworthiness, according to the SEC. Jack Vogel, head of Goldman’s commercial paper credit department, told the SEC that Goldman got one new commercial paper client a week and issued paper for some 250 separate companies. Vogel had a staff of four people to help him decide the creditworthiness of these companies and to help him review their prospects on an ongoing basis.
Within weeks of the ICC’s decision to allow Penn Central to issue commercial paper, Goldman was busy flogging $100 million of it. Between September 1969 and May 1970, though, the SEC contended that Goldman “gained possession of material adverse information, some from public sources and some from nonpublic sources indicating a continuing deterioration of the financial condition of the [railroad]. Goldman, Sachs did not communicate this information to its commercial paper customers, nor did it undertake a thorough investigation of the company. If Goldman, Sachs had heeded these warnings and undertaken a reevaluation of the company, it would have learned that its condition was substantially worse than had been publicly reported.”
From public information available in November 1969, Goldman should have known that Penn Central, the railroad (as opposed to the holding company, with other assets in it like Grand Central, Madison Square Garden, and a private-jet leasing business), had lost $40.2 million during the first nine months of 1969, $26.4 million more than the railroad lost in 1968. Also in November, Penn Central decided not to pay its quarterly dividend, often a sign of impending financial trouble. In his testimony at the time before the ICC, Penn Central’s outside counsel explained the company was “having a very difficult time effecting the merger” of the two railroads. (“[M]anagement was very upset by this statement,” the SEC reported.) “[T]his did not cause Goldman, Sachs to re-examine the financial condition of the company whose paper Goldman, Sachs was selling as prime rated commercial paper,” the SEC found.
Goldman’s Wilson had concerns about Penn Central. On September 3, 1969, he requested a meeting with the company’s senior executives in the finance division. “[I]t had been a long time since we had gotten together to talk about the company,” he wrote in an internal memo. “We have a lot of questions to ask about the merger, cash flow, and their long term financing plans.” On September 19, Wilson and his Goldman colleagues met with Jonathan O’Herron, Penn Central’s vice president of finance. O’Herron told Wilson that Penn Central’s cash position in the first quarter of 1970 would be “very tight” and asked Goldman to sell “as much commercial paper as possible through April or longer.” At that moment, lawyers would later argue, “Goldman Sachs was in possession of material, adverse non-public information about Penn Central which it failed to disclose.” On October 22, O’Herron told Wilson that Penn Central would “show a small loss” in its third quarter but that the fourth quarter would improve and the company would be “in the black.”
A week later, the ICC agreed to allow Penn Central to increase its commercial paper outstanding to $200 million, from $150 million. But the regulatory agency noted its concern that the company had a “deficit working capital situation” and seemed to be increasingly reliant on short-term financing—the commercial paper—to try to refinance long-term debt or to make capital expenditures. “The exhaustion of short-term credit to refinance maturing long-term debt or to finance long-term capital expenditures could expose a carrier to a serious crisis in the event of an economic squeeze, at which time a carrier may require short-term financing for traditional use,” the ICC observed. “We are, therefore, concerned about the use of short-term financing for long-term purposes and feel that where necessary it should be resorted to cautiously.”
According to the SEC, Goldman “never did explore in any depth” the topics Wilson said he wanted to investigate in his September memo, and the red flags raised by O’Herron and by the ICC “raised serious questions about the soundness” of Penn Central and “the safety of investing in its commercial paper.” The observations “indicated that the company was experiencing a liquidity crisis and that it might find it extremely difficult in the future to meet its cash needs, thus jeopardizing commercial paper holders,” according to the SEC. “A thorough study of the subject would have disclosed how much more damaging the information about the liquidity of the company and its ability to pay off commercial paper holders was.” But Goldman did not “conduct any further investigation” and “made no disclosure of” the information “while continuing to actively promote the company’s commercial paper. Customers were not told that the company expected to be in a tight cash position in the near future; were not told about the ICC order or the information about the deficit working capital situation or the fact that the company’s commercial paper proceeds were being used for long-term financing.”
But, according to the SEC, while Goldman did not share the bad news with its customers and continued to sell the increasingly squirrelly Penn Central commercial paper to them, it did use the public and nonpublic information to protect itself and its partners from having any of the paper on its own books. At the September 19 meeting, Wilson asked O’Herron to have Penn Central arrange for additional backup lines of credit from its banks to support the company’s commercial paper program. In other words, Goldman wanted Penn Central to have another source of liquidity—banks—to borrow money from to make
sure that its outstanding commercial paper, then around $200 million, could be paid off as it came due in the coming months. At that moment, Penn Central had already borrowed $250 million of its $300 million line of credit with a bank group, and O’Herron told Wilson the company intended to borrow the last $50 million to have in reserve to pay off the commercial paper if needed. Wilson asked O’Herron to get another $50 million as a backup for the commercial paper program. Even though Wilson did not like O’Herron’s answer, O’Herron told him the company would not do it: “Penn Central already had a line of credit.”
Throughout the first quarter of 1970, Goldman kept pushing Penn Central to increase its line of credit with its banks. “The management of the company was very reluctant to ask the banks for more line credit,” the SEC found. “Although Goldman, Sachs never inquired too deeply into the reasons for the company’s reluctance, it should have been apparent that the company had exhausted all credit.” In his testimony to the SEC, Wilson conceded that such information “was information that investors would have considered important” but, according to the SEC, Goldman never disclosed it to its commercial paper customers. On February 5, 1970, O’Herron told Wilson that the company “could not raise any additional lines of credit,” according to the SEC, which observed that “the inability of the company” to get the additional financing “as with other relevant information” was “not disclosed to customers.”
February 5 turned out to be a busy day. Rather than the profit that Penn Central had earlier projected that the railroad would earn in the fourth quarter of 1969, the company announced that the railroad had lost $16 million, and lost $56 million for the full year. Wilson called O’Herron to set up a meeting to discuss the unexpected loss. The next day, Levy and Wilson met with Bevan and O’Herron. The company, Bevan explained, needed another $170 million for capital expenditures, which, combined with the expected loss, would bring its financing needs for the year to around $226 million. Bevan told Levy and Wilson that Penn Central had a variety of ideas about how to raise this additional financing, through a combination of a bridge loan, a Euro-dollar loan, and other financings. Levy and Wilson did not ask Bevan for the specifics of how he intended to raise this needed money. “I had complete confidence in Mr. Bevan’s integrity,” Levy told the SEC, “that he could do what he said he could do.”
Money and Power Page 24
