Goldman first teamed up with Russian investment firm Digital Sky Technologies, which has already invested $500 million in Facebook, to pump more money into the social network giant. Goldman reportedly put in $450 million and Digital Sky another $450 million.
Then, Goldman set Facebook's value at $50 billion and began soliciting money from the wealthier side of its client base. Each would have to put in $2 million a pop.
Now comes the interesting part: Goldman wants to put the monies raised into a special-purpose vehicle and manage the funds on behalf of its clients. The funds won't be subject to audit and Goldman won't have them on its books.
SPVs were used by Enron in its financial double-dealings in the late 1980s.
"The whole thing just looks sketchy to me," Addison Wiggin, the executive publisher of financial publishers Agora Financial told the E-Commerce Times.
Goldman Sachs did not respond to requests for comment by press time.
An SPV can be considered a single shareholder even though it consists of several investors, according to the Securities and Exchange Commission's rules.
Those rules also essentially require a company to publicly list its stock if it has at least 500 holders of that stock on record and its assets exceed $10 million on the last day of its fiscal year.
If the issuer knows that the form of holding securities of record was used to circumvent the provisions of Section 12(g) or 15(d) of the Securities and Exchange Act, the ownership of the stock would devolve to the owner on record.
In other words, if Goldman Sachs knows, or has reason to know, that the SPV was set up to get around the SEC rules, the whole thing goes kablooey.
Prospective investors reportedly won't have access to the notoriously secretive Facebook's accounts, although Goldman Sachs, which will manage the SPV, will. In other words, investors won't know if they're buying a pig in a poke.
Goldman will have access to Facebook's accounts but it has $450 million worth of interests bound up with those of Facebook. That's a cause of worry for some investors.
"It looks to me like that's typical of what the investment banks have been doing for the past decade, which is trading paper for profits instead of investing in revenue streams," Agora Financial's Wiggin remarked.
There are also questions surrounding claims that Facebook made $2 billion in revenues off online ads last year because these can't be substantiated.
"The $2 billion is speculation," Barry Schnitt, a Facebook spokesperson, told the E-Commerce Times. "We haven't disclosed any revenue figures," he added.
Some investors are also concerned because Facebook, as a private company, doesn't need to have its accounts audited by an independent third party.
"Somehow, Facebook's skirted SEC requirements up to this point, and the SEC doesn't seem to be too interested right now," Wiggin said.
"We have not confirmed or denied whether we're launching any investigations," Kevin Callaghan, an SEC attorney, told the E-Commerce Times when asked whether the commission might be looking into the Goldman-Facebook deal.
"We have not been offering interpretations either, because such things are very dependent on circumstances and facts, and that would make broad statements by us potentially misleading," Callaghan pointed out.
Goldman's past has also been giving observers concern.
In April of last year, the SEC charged Goldman Sachs and one of its vice presidents, Fabrice Tourre, with fraud in connection to the subprime mortgage crisis.
In essence, the SEC said Goldman structured and marketed a synthetic collateralized debt obligation (CDO) that depended on the performance of subprime residential mortgage-backed securities, then didn't disclose vital information about the CDO.
That CDO was structured for Paulson & Co., one of the world's largest hedge funds, which then bet against the mortgage securities, making a bundle when the housing market collapsed.
In July, Goldman paid a record $550 million in fines and agreed to reform its business practices to settle those charges.
However, that doesn't settle any other past, current or future SEC investigations into Goldman. The case against Tourre is still proceeding, the SEC's Callaghan said.
With regard to the Facebook deal, Goldman reportedly retains the option to sell up to $75 million worth of its stake to Digital Sky at Facebook's $50 billion valuation.
"It looks like there's an easy out for Goldman," Agora Financial's Wiggin stated. "Our interest is in keeping our readers away from investing in these kinds of things."
It's possible that fears about the Goldman Sachs-Facebook deal are misplaced.
"Goldman's putting its reputation on the line for this," Rob Enderle, principal analyst at the Enderle Group, told the E-Commerce Times. "It would be liable should there be any misrepresentation, not to mention the possibility of its facing criminal action."
Wealthy investors who take up Goldman's offer will probably be safe, Enderle suggested.
"We're not talking about inexperienced investors who don't have the resources to hire attorneys if this goes south," Enderle remarked. "Investors at this level generally got the money they have by knowing how to analyze risk effectively and protecting their assets well. There are Madoff moments, but this doesn't look like one of them." 
By Rob Spiegel
Print Version 
E-Mail Article 
Reprints 
More by Rob Spiegel
Days before Verizon is expected to kick off its 4G rush in earnest with a slate of new LTE phones, Sprint has trumpeted the arrival of a new 4G device for its own network. The EVO Shift is similar to the existing Sprint EVO but adds a slide-out QWERTY keypad. The unit's competitively priced, but added costs for 4G service and the still-limited reach of 4G networks may give some buyers pause. 
Qualcomm's acquisition of WiFi technology company Atheros is drawing generally positive reactions, since it will be able to maintain its core strengths while advancing into new markets. There are a couple of companies that might not be so sanguine about the deal. Broadcom will begin feeling the heat, and Texas Instruments could also break a sweat. Goldman Gives Facebook a $450M Lift
Facebook is gearing up to compete in the major leagues, and it just got a strong helping hand from Goldman Sachs, to the tune of $450 million. Goldman partner Digital Sky poured another $50 million into the social network, which brings its valuation to a cool $50 billion. "There's a feeding frenzy around this property," noted tech analyst Rob Enderle. "Facebook has to grow very quickly." Survey Surprise: Online Content Doesn't Have to Be Free
Though there's still plenty of experimentation with different business models, online content providers are finding that many consumers are actually not averse to paying for content they value. In fact, the Pew researchers discovered a surprising willingness to subscribe to newspapers and magazines online.
By Javad Heydary
The boom has fallen on Winifred Jiau, a California consultant accused by federal investigators of selling financial information on a couple of tech firms for the purpose of insider trading. Jiau faces a potential 20 years in prison, along with a $5 million fine, for committing securities fraud, the more serious of the two charges brought against her. 
Twitter has the capacity for providing an easy outlet for individuals to vent about their daily travails and perceived insults. However, users should exercise caution. Indeed, they need to be cognizant that despite the ease with which the need for their emotional catharsis can be satiated, there is an audience, and there is an ever-looming possibility of causing someone serious harm. Online Gambling: Keeping Up With the Joneses
Should the U.S. fail to proceed expeditiously with the pending legislation legalizing online gaming, it faces the risk that it will lose considerable ground to other jurisdictions -- such as Canada -- that have accepted the futility of banning online gaming and have moved to regulate it. Net Gambling Payers Caught in Controversial Legal Web
The online gambling industry is quite interested to see legal arguments in defense of online poker presented in a cogent and analytical form. The rationale is that if poker is a skill and is not gambling, then as a corollary, processing payments from poker-derived transactions is not illegal. Should this defense prove to be successful, it would have wide-ranging implications.