http://www.istockanalyst.com/article/viewarticle/articleid/4080099

In light of the fact that Baidu stock is now valued at $700 instead of $27 asserted by Goldman Sachs as the "fair value" (by the way, Goldman has never been so wrong on price targets.), and the fact
that Goldman actively trades against its clients, it is now high time
for the U.S. federal prosecutors probe into Goldman's trading practice
of Baidu IPOs as well.

Goldman was one of the underwriters of Baidu's IPO in 2005. Goldman
spent months promoting the Baidu stocks to investors; however, they did
not understand the value of Baidu being the Google of China, and most
likely betted against their client--Baidu.

The following is an updated version of my original article on Goldman
and Baidu, which should lead to only one probable conclusion-- With
Baidu IPOs being a phenomenal success, Goldman needed to orchestrate a
public statement to quickly reverse their losing positions, and
probably committed fraud in order to save their behind.

Much has been said about Goldman Sachs (GS) by articles like Mr. Matt Taibbi July 2, 2009 Rolling Stone "Inside the Great American
Bubble Machine". But most have not heard about Goldman Sachs'
involvement in the initial public offering (IPO) of Baidu (BIDU) and
the subsequent BIDU share price movements back in 2005 and 2006.

Goldman Sachs and Piper Jaffray (PJC), along with Credit Suisse First
Boston (CS), underwrote Baidu's IPO. The IPO would be the first for a
pure-play Chinese search engine company. Baidu American depositary
shares (ADS) started trading on August 5, 2005. An initial 4.04 million
ADSs were offered at $27 per ADS; opened at $66, more than double its
$27 price, climbed, stabilized and then rallied anew before ending its
historic opening day at $122.54.

With a rise of 354%, Baidu's first-day gain ranks 18th in history and
ranks as the best performance ever by an overseas deal. At its IPO
price of $27 a share, the company raised $109 million. Part of the big
debut-day move from Baidu.com can be traced to the relatively small
size of the deal.

With only 4.04 million shares in the IPO and strong indications of interest from both retail and institutional investors, demand had
driven up the price throughout the process. The widely circulated rumor
at the time that Google (GOOG) had attempted to buy the firm fueled
interest in the stock and gave investors confidence in it as well.

Typically, underwriters would only be overjoyed when a stock they took IPO shot up like this in its debut.

But the course of action Goldman and Piper Jaffrey took next was totally unprecedented and completely out of character for investment
bankers.

Forty days after Baidu went public, the minimum period before an
underwriting firm can release an analyst report, on Sep. 14, 2005, at
6:00 am before the market opened, Goldman Sachs and Piper Jaffray, two
of Baidu's underwriters, issued a joint statement that rated the
company stock as "underperform". Goldman even went so far as to say
that the company is worth exactly $27 a share, which is the same as its
IPO price.

Anthony Noto, the Goldman analyst, also said that "at the most
extreme", Baidu could be worth $45 a share. At the Piper Jaffray camp,
$45 was also cited as the price target on the stock -- a mark, Safa
Rashtchy, the analyst at Piper Jaffray said, that includes "an
aggressive valuation premium". Shares of Baidu closed at $113 the day
before, and it had been as high as $153.

At the time, media touted Goldman's unusual move as a welcoming sign
that analysts and investment banks were moving away from
rubber-stamping clients stocks. Investment banks normally wouldn't have
been so harsh on a recent IPO, fearing it might get left out of future
lucrative banking deals. In the 1999 and 2000 heyday, only 3% of IPOs
were initiated with a "hold" or lower rating after the IPO.

According to Taibbi, Goldman's bankers used techniques called
"laddering" and "spinning". In laddering, an investment bank would
allot IPO shares to institutional investors who promised to buy more
once trading in the new firm began. There is also ‘spinning" where the
investment bank would offer a chosen few the newly public company
shares at extra-low prices, in exchange for future underwriting
business.

Banks that engaged in spinning would then undervalue the initial
offering price — ensuring that those "hot" opening-price shares it had
handed out would be more likely to rise quickly, supplying bigger first
day rewards for the "insiders". Now, don't they sound eerily familiar
in the case of Baidu's IPO?

BIDU dropped 29% to $81.05 by Oct 26, 2005. Goldman then subsequently
made five consecutive major downgrade calls from October 2005 through
Nov 2006. However, Baidu only reached its lowest ever share price of
around $51 in Feb. 2006. Despite four more Goldman downgrades from Feb.
to Nov 2006, Baidu shares went up to $117 by Dec. 15, 2006.

p till May 2006, Goldman was still saying Baidu shares at $65 were 10% overvalued. True to the old saying "If you can't beat them, join them.", in Dec.

2006, Goldman raised Baidu target price to $128, only about one year after the conspicuous joint press conference with Piper Jaffray, where
Goldman named an exact $27 as fair price on Baidu.

So, at this point, anyone would be highly suspicious of this suddenly
emerged "objectivity" of BIDU`s fair value. One could only draw the
conclusion: it was to Goldman's benefits to push down the share price
of Baidu. There are three possible scenarios:

(1) Goldman did not do its homework and seriously undervalued Baidu;
therefore, the 6:00 am press conference could be meant to save face and
avoid potential law suits from Baidu. Baidu and Goldman were reportedly
far apart on valuation. Baidu was looking for a market cap of $1
billion, and Goldman, suggested around a third of that.

(2) Between the laddering and spinning, Baidu shares probably went up
too high, too quickly for Goldman and its insiders to profit. So, at
that point, the only way Goldman could have rectified the situation
expeditiously was to issue a major downgrade immediately after the
40-day lockout period.

(3) The growth momentum of the Internet run in China had and still has
room to expand, and is expected to accelerate on the heels of strong
user base expansion and increased utilization. Goldman, who spent all
this time, energy and money doing road shows, knew the true value of
Baidu, judging by the $128 target price about one year after the
"objective" $27 valuation, could be trying to accumulate positions.

Among all the things in which Goldman has allegedly been involved or
under investigations by regulatory authorities, this little anomaly has
never caught any publicity or scrutiny, mostly because Baidu just went
about its business as usual without escalating it into a public fiasco,
which has been Baidu's management style. In addition, Baidu was an
overseas start-up company, hence probably under most major media's
radar screen.

To Baidu's credit, the company's sound performance and strong market
fundamentals have propelled its shares from the low point of around $51
back in Feb. 2006 to a high of about $409 the week of Oct. 29, 2007.
BIDU closed at almost $709.87 on Thursday, April 29, 2010.

So, there you have it – another possible explanation of how Goldman
could afford to pay out record bonuses every year – they seem to play
by a different set of rules. Goldman Sachs' powerful political and
financial connections apparently have insulated it from regulators
whose job is to maintain fair and balanced markets. However, when
Goldman Sachs is involved – fair and balanced appears to have taken on
an entirely new connotation.