Goldman Sachs May Sell or Hedge Facebook Stake Without Warning

Goldman Sachs Group Inc. clients considering whether to buy shares in closely held Facebook Inc. should take heed: Wall Street’s most profitable securities firm could unload its own holdings without letting them know.

In the last sentence of a one-page investment profile sent to private wealth clients, the firm explains: “GS Group may at any time further reduce its exposure to its investment in Facebook (through hedging arrangements, sales or otherwise), without notice to the fund or investors in the fund.”

The offering document, obtained by Bloomberg News, shows that $75 million of the $450 million investment in Facebook by Goldman Sachs is coming from Goldman Sachs Investment Partners, a hedge fund that handles client money. The firm’s own $375 million investment will probably be cut to $300 million because Goldman Sachs expects to sell $75 million to third parties or to the fund it created so clients could buy a stake in Facebook.

“There may be conflicts of interest relating to the underlying investments of the fund and Goldman Sachs,” according to the Facebook offering document’s disclosures section. Material in the documents “is not guaranteed as to accuracy or completeness.”

Goldman Sachs paid $550 million in July to settle fraud charges filed by the Securities and Exchange Commission relating to the 2007 sale of a mortgage-linked investment called Abacus. The company said it made a “mistake” by failing to inform clients in the 2007 deal that it allowed a hedge fund betting against the investment to help put together the deal.

Stephen Cohen, a Goldman Sachs spokesman in New York, declined to comment yesterday. Jonathan Thaw, a spokesman for Facebook, also declined to comment.

Rules for Clients

To get a stake in Facebook, Goldman Sachs clients are required to make a minimum investment of $2 million by Jan. 7 in what’s described as limited partnerships based in the Cayman Islands and Delaware. Goldman Sachs is charging 0.5 percent of any capital committed to the partnership as an “expense reserve” as well as a 4 percent placement fee and 5 percent of any gains, according to the document.

Richard A. Friedman, head of an internal investment group in the firm called Goldman Sachs Capital Partners, turned down an opportunity to invest in Facebook because he decided it wasn’t right for his funds, according to a person familiar with the decision. The New York Times reported Friedman’s decision earlier today.

Friedman thought the investment wasn’t appropriate because of its high valuation and because it didn’t match his investing criteria, the newspaper said. The Goldman Sachs deal values Facebook at $50 billion.

Active Users

Facebook has more than 600 million monthly active users, of whom more than 230 million access the site on mobile devices, the document shows. Statistics available on Facebook’s website indicate it has more than 500 million monthly active users and more than 200 million access from mobile devices.

A letter addressed to “potential investor” that introduces the Facebook investment profile ends with a two- sentence paragraph. The first asks potential investors to contact a Goldman Sachs representative for further information. The second says:

“Do not contact Facebook.”

To contact the reporters on this story: Max Abelson in New York at mabelson@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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