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Tuesday, July 21, 2009

As Goldman exec, Obama nominee played key role in Sudan-linked IPO
Despite human rights concerns, State Dept nominee pushed through illegal PetroChina offering President Obama's recent nominee for undersecretary of state, Robert Hormats, is another in a long line of Goldman Sachs executives to secure influential posts in government. But his nomination deserves special scrutiny, above and beyond growing concern surrounding the bank's influence in government. Hormats played a crucial role in a 2000 Goldman Sachs deal that was fervently opposed by religious groups and human rights advocates and later cited by the SEC as an example of illegal market manipulation: the $3 billion initial public offering of PetroChina, a company with ties to Sudan's genocidal regime. Key facts concerning Hormats's role in the PetroChina IPO:
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With the PetroChina IPO facing significant opposition from human rights advocates, Hormats assured members of the press that no funds from the offering would be used for work in Sudan. These statements later proved to be inaccurate and misleading. Several large institutional investors, including Harvard, have since divested from PetroChina, citing human rights concerns. The SEC later cited Hormats's remarks as evidence of illegal market tampering, or "market conditioning," in a larger case against Goldman Sachs, which the bank settled for $2 million.

Hormats's role in the PetroChina deal raises serious questions about his fitness to serve in a post that will give him substantial influence over international economic policy and US-China relations.

Illegal and deceptive financial practices. As a Wall Street executive, Hormats deceived investors and violated SEC rules in order to promote Goldman Sachs' interests in the PetroChina deal. With this record, can he be a credible advocate for sound international economic policy? China, Sudan, and human rights. By offering support for the PetroChina deal, Hormats flouted human rights and national security concerns as they pertained to China and Sudan. With this record, can he effectively represent US interests in managing US-China policy? Goldman Sachs and conflicts of interest. How will Hormats negotiate the conflicts of interest accrued during his time at Goldman Sachs?

These questions deserve critical examination from the Senate as it considers the Hormats nomination. This Public Accountability Initiative brief outlines key findings and supporting documentation and raises important questions for Robert Hormats. The Public Accountability Initiative is a 501(c)3 research and educational organization focused on corporate and government accountability. To learn more, see p. 6 of this brief, visit our website at, or see our work at LittleSis (

Key Findings & Supporting Documentation
The following findings concern Robert Hormats's role in the Goldman Sachs-backed initial public offering of stock in PetroChina, a Chinese oil company, which took place in spring 2000. At the time, Hormats was a managing director at the bank and a vice chairman at Goldman Sachs International, where he advised foreign countries on financial strategies. Hormats joined the bank in 1982 after 12 years at the National Security Council (under Henry Kissinger) and Department of State. 1. The PetroChina IPO drew fierce opposition from religious, labor, and human rights groups. The PetroChina IPO faced significant opposition from religious groups, labor unions, and human rights advocates because of its parent company's business dealings with the government of Sudan. Its parent, the China National Petroleum Company (CNPC), had had extensive business dealings with the government of Sudan, a notorious human rights violator. At the time, the US had already put Sudan under economic sanctions; President Bush has since described Sudan's mass killings as "genocide." From the Washington Post, January 27, 2000: Conservative religious and human rights groups have launched a campaign to block China's largest petroleum company from listing an affiliated company on the New York Stock Exchange next month because of its oil investments in Sudan, an African nation under extensive U.S. sanctions because of its alleged support of terrorism and persecution of Christians. Leaders of the campaign charge that the Chinese-backed Islamic fundamentalist regime there is committing "genocide" in its war against a Christian-led rebel movement in the south and encouraging a flourishing trade in non-Muslim slaves.1 This was not a fringe effort; opposition to the PetroChina IPO included former members of the Reagan administration and members of Congress. Spencer Bachus, chair of the Monetary Policy Committee, asked SEC chair Arthur Levitt for an investigation into the PetroChina IPO, highlighting PetroChina's links to Sudan and the relationship between oil revenues and Sudan's human rights violations.

The campaign against the PetroChina IPO united a wide range of advocacy groups, including Students for a Free Tibet, the AFL-CIO, Christian Solidarity International, and the Southern Baptist Convention. According to Kevin Reeves, a Smith professor and longtime Sudan activist, "We hammered that IPO."2  2. This opposition was successful in convincing several large investors not to participate in the IPO. As early as January, 2000, more than two months before the PetroChina IPO, the Washington Post reported that at least two large pension funds, among the largest investors in the US, had opted out of

1 "Chinese Fought on NYSE Listing; Groups Cite Oil Firm's Role in Sudan," Washington Post, January 27, 2000. 2 "Endowment tied to Sudan," The Harvard Crimson, October 25, 2004.

the PetroChina IPO, citing human rights concerns.3 Business Week reported, as of April 2000, that the AFL-CIO had convinced investors controlling nearly $1 trillion in assets to put out statements saying that they would not participate in the deal: So far, major funds shunning the IPO include Vanguard, CalPERS, TIAA-CREF (the $250 billion teachers' pension fund), and the public employee pension funds of New York City, New York State, and California. "The larger question is how safe an investment is in countries that do not have freedom or democracy," says California State Treasurer Philip Angelides, who sits on the board of the $172 billion CalPERS.4 The size of the PetroChina IPO was reportedly cut back from $10 billion to $5 billion, and ended up coming in under-subscribed, at $2.89 billion. 3. To reassure investors, Hormats told journalists that the IPO would not fund work in Sudan. As opposition intensified in early 2000, Robert Hormats, vice chairman of Goldman Sachs International, began telling members of the press that money raised through the PetroChina IPO would not fund work in Sudan and that there were "firewalls" in place to ensure that IPO funds would only be used domestically. Hormats offered these assurances on at least four occasions, and was the only Goldman Sachs executive to do so:

Wall Street Journal, 1/14/2000: "Sudan should not be an issue because of extensive legal firewalls in place to ensure that IPO proceeds are used domestically in China," said Robert Hormats, vice chairman of Goldman Sachs International.5 Business Week, 1/24/2000: "It's not an issue because of the extraordinary steps the company is taking to ensure IPO proceeds are only used domestically,'' says Goldman Sachs International Vice-Chairman Robert D. Hormats.6 Washington Post, 1/27/2000: "The structure of the deal emerging should mean that Sudan is not an issue because of the safeguards ensuring all the funds raised here will be used domestically," said Robert D. Hormats, Goldman Sachs International vice chairman and a former National Security Council and State Department official. "PetroChina will be a purely domestic company." LA Times, 2/14/2000: "No one is saying there aren't problems there" in Sudan, says Robert Hormats, vice chairman of Goldman Sachs International and a former assistant secretary of State. "But . . . this particular transaction should not be affected by concerns about Sudan or

3 "Chinese Fought on NYSE Listing; Groups Cite Oil Firm's Role in Sudan," Washington Post, January 27, 2000. 4 "PetroChina: Pouring Oil on the Flames," BusinessWeek, April 3, 2000. 5 "PetroChina Hopes to Shake Off Its Past --- As Big Stock Offer Looms, Beijing Hopes Oil Giant Can Shed Political Roots," Wall Street Journal, January 14, 2000. 6 "Can this Giant Fly on Wall Street?", Business Week, January 24, 2000.

other parts of the world."7 4. Hormats's assurances were inaccurate and misleading. Contrary to Hormats's statements, "firewalls" were not in place, and funds from the IPO went to PetroChina's parent, CNPC. These barriers would supposedly keep IPO funds from financing Sudan's genocidal regime. Eric Reeves, Smith College professor and human rights activist, was later quoted in the Harvard Crimson as saying “There was no firewall...a full 10 percent of the IPO proceeds went directly to China National Petroleum Company for use however, wherever they wanted.”8 Earlier versions of the PetroChina proposal had also included provisions for CNPC. Representative Spencer Bachus reacted to this in his March 16, 2000 letter to SEC chair Arthur Levitt, saying that "there is no question that this will significantly increase CNPC's access to financing that would otherwise be unavailable to fund its foreign operations" and that various elements of the IPO proposal "eviscerate the assertion that a legal firewall has been created."9

5. The SEC pointed to Hormats's remarks as evidence of illegal promotion of the PetroChina IPO. The SEC subsequently sanctioned Goldman Sachs for Hormats's pre-IPO comments to the media, in combination with other violations. The administrative proceeding did not name Hormats, but identified a "senior Goldman representative" whose quotes matched those of Hormats. The Washington Post later noted that they were one and the same.10 Hormats's quotes were in violation of SEC rules because they constituted the marketing of PetroChina stock, or sales "offers," prior to the actual filing of the registration statement: The Senior Goldman Representative's statements to the press were designed to correct a public perception that the money raised by the PetroChina offering would be used, at least in part, in Sudan rather than in China, and therefore would violate sanctions imposed by the U.S. In the context of this offering, in which the use of the offering proceeds was a controversial issue and a focus of efforts to prevent the PetroChina offering from going forward, these statements had the potential to facilitate the sale of PetroChina securities to concerned investors. The statements therefore constituted "offers."...The statements, therefore, constituted an illegal offer, because there was no registration statement on file at the time and no exemption from registration was applicable.11

7 "Curbs Urged on Foreign Firms' Wall Street Access," LA Times, February 13, 2000. 8 "Endowment tied to Sudan," The Harvard Crimson, October 25, 2004. 9 Letter from Spencer Bachus to Arthur Levitt, March 16, 2000. 10 "Goldman Settles Charges of Illegally Promoting Stock," Washington Post, July 2, 2004. 11 SEC Administrative proceeding file no. 3-11533, In the Matter of Goldman Sachs, July 1, 2004,

Hormats had reportedly consulted with Goldman lawyers before making these comments to the press, but this was not enough to avoid SEC sanctions. These violations came in the context of the IPO craze of the dot com years, when investment banks were reaping massive windfalls by taking companies public. The practices of investment banks during this period later became a focus of investigations by New York Attorney General Eliot Spitzer. Hormats's and Goldman's pre-IPO promotion of the stock to large institutional investors and Hormats's misrepresentations to journalists were consistent with the illegal practices that later resulted in much larger Wall Street settlements (Goldman Sachs settled this case for $2 million). 6. Large institutional investors have since divested from PetroChina, citing human rights concerns. Since the PetroChina IPO, the company has become a high-priority target in the Sudan divestment campaign. Several large institutional investors who initially participated in the PetroChina IPO have since divested, citing human rights concerns. These institutions were predominantly universities, including Harvard, Yale, Stanford, Amherst, and Dartmouth.12

12 "Yale Drops Sinopec as Harvard Holds On," The Harvard Crimson, February 16, 2006.

Questions for Robert Hormats
Hormats, as Obama's nominee for undersecretary of state for economic, energy, and agricultural affairs (known as E), will require Senate confirmation before taking his post and should be asked the following basic questions about his time at Goldman Sachs:

Did Hormats advise the Chinese government on the PetroChina deal? Was Hormats involved in structuring the deal? Which foreign governments has Hormats advised, as vice chairman at Goldman Sachs? What was the nature of this advisory relationship? Which of Goldman's foreign financial deals has Hormats played an active role in? What was the nature of this role? Did Hormats play a role in the 1997 Gazprom financing that Congress held up due to concerns over the Russian company's ties to Iran? Hormats had advised the Russian government, starting in the early 1990s. What was the nature of Hormats's consulting role and business activities during the following economic crises? Hormats frequently spoke to the press about these issues, but rarely described the nature of his personal involvement before, during, and after these crises.
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1994: Mexican peso crisis. 1997: Asian financial crisis (Thailand, Indonesia, Japan, etc.) 1998: Russia's default on its debt. 1999: Brazil's currency crisis. 2008: global oil/commodity spike. 2008: US financial crisis.

About the Public Accountability Initiative
The Public Accountability Initiative (PAI), a 501(c)3 nonprofit, is a nonpartisan research and educational organization focused on corporate and government accountability. Our mission is to facilitate and produce investigative research that supports strategic community action and empowers citizens to hold their leaders accountable. PAI was formed in early 2008 by a group of academics, public interest lawyers, researchers, and web developers affiliated with leading universities and major social change organizations. In previous years, members of PAI's staff and board have collaborated on high-profile campaigns and generated original accountability research that has appeared on the front pages of the Wall Street Journal, the Boston Globe, and other major media outlets. PAI's focal project is LittleSis (, an open database of connections between powerful individuals and institutions. Contact: Kevin Connor,, 718-916-0925.