Did Nancy Pelosi do something untoward when she bought shares of Visa’s gangbusters initial public offering (IPO) in 2008?
After picking through her disclosure forms, it looks a lot less likely that Pelosi was looking for a quick payday. What’s still unresolved, however, are ethical questions about buying and selling shares of companies that will be heavily impacted by legislation before Congress.
Pelosi is implicitly charged with getting improper treatment from Visa during their 2008 IPO, then the largest of all time. The following is Sunday's "60 Minutes’ "lead in to the segment on Pelosi. The speaker is Peter Schweizer, whose investigation into stock trading on Capitol Hill is featured in the "60 Minutes" report:
"If you were a senator, Steve, and I gave you $10,000 cash, one or both of us is probably gonna go to jail. But if I’m a corporate executive and you’re a senator, and I give you IPO shares in stock and over the course of one day that stock nets you $100,000, that’s completely legal."
When you get into the facts of how these IPOs work and how Pelosi actually acted, however, that charge of impropriety looks less likely.
"60 Minutes" reports that Pelosi bought 5,000 shares of Visa at $44 each on March 18. (To put that into context, Pelosi’s net worth in 2009 - she’s married to real estate investor and venture capitalist Paul Pelosi - was $21.7 million.) Pelosi spent roughly $220,000 (excluding trading costs) on the Visa IPO. Considering the IPO was a then-record $17.9 billion, Pelosi’s take was vanishingly small.
Much has been made of the fact that the stock popped to around $60 in the following days, netting Pelosi a cool $80,000. Of course, she didn’t sell her stock then. In fact, Pelosi bought more. Much more.
Pelosi bought in two more tranches, her financial disclosure records show. As her office released today, those were on March 25, 2008 (10,000 shares at $64) and on June 4 (5,000 shares at $86). Pelosi ended up with nearly $1.3 million in shares at an average cost of $64.50, well above the IPO price and consistent with an investor looking to buy a long-term holding, not flip the stock for a short-term profit.
In fact, since that time Pelosi has held on to nearly all of her Visa stake outside of one sale for between $15,000 and $50,000 - which delivered her a loss of $2,500 to $5,000 in the winter of 2008.
Initial public offerings, moreover, are complicated business. We won’t bore you with the details here, but read the SEC’s worthy - and short - breakdown. We’ll point you toward this line:
"Most underwriters target institutional or wealthy investors in IPO distributions. Underwriters believe that institutional and wealthy investors are better able to buy large blocks of IPO shares, assume the financial risk, and hold the investment for the long term."
In other words, bankers have discretion in who they allocate shares to. And it’s not just the Nancy Pelosis of the world who cash in - it’s investors who do a lot of business with the banks running the IPO, investors with the right type of investing philosophy (as determined by the company and bankers), investors who specialize in the sector the firm is in, and a score of other small groups with other, less professional affiliations with the firm.
What this comes down to is a point of emphasis. If you think the appearance of impropriety is enough, then Pelosi has already blown herself up in the court of public opinion. If the specifics of how IPOs function and the actual way Pelosi has treated her investment is more important, that would make her guilty of being part of a piecemeal and highly subjective process, at worst, and not wielding undue influence.
All of this, of course, has nothing to do with whether a politician’s personal financial holdings impact their decisions in Congress. You can find the case against Pelosi on this score here and her rebuttal here.
Read the SEC’s instructions how ordinary investors should think about buying IPOs.
Download copies of Nancy Pelosi’s disclosure forms here (free registration required).
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