Conflicts in the News – Wall Street Edition
In 2010, Goldman Sachs made headlines (and history) in a conflicts-of-interest related enforcement action by agreeing to the largest SEC settlement ever paid by a Wall Street firm in any kind of case. And this week the firm was back in court, facing what a Delaware judge called “serious” allegations of conflicts of interest arising from its multiple roles in connection with Kinder Morgan’s purchase of El Paso Corp.
Here is what seems to be a good summary of the allegations made by El Paso shareholders: “Goldman was advising … El Paso on a plan to spin off its exploration business last year when crosstown rival Kinder Morgan offered to buy the entire company for $21.1 billion. Goldman private equity funds own a big chunk of Kinder Morgan and have two representatives on the board…Goldman used its influence to steer El Paso into accepting a lower price than it was worth while scooping up bigger advisory fees than it would have from the exploration unit’s spinoff. The first sign that Goldman might be pulling strings in the deal came even before it was announced, when Goldman’s equity analysts upgraded their rating on Kinder Morgan, but the conflicts in the transaction apparently went much deeper…[El Paso CEO] Doug Foshee privately discussed a management buyout of the exploration business with Kinder Morgan chief Rich Kinder [but] never revealed that conversation to El Paso’s board…Foshee was willing to sell the company on the cheap if he got to walk away with the exploration business.”
I should add that “Kinder, Goldman and El Paso all have said they took appropriate steps to mitigate any potential conflicts in the deal,” and the judge has reserved his ruling. Still, it is hard to argue with the judgment of corporate governance expert Charles Elson that: “Given all the bad press Goldman has gotten recently, it might have been better if they’d taken a pass on serving as an adviser in this deal…”
I should also add that Goldman is not the only investment bank to have faced serious COI allegations in court recently. Last fall, Barclays PLC and Del Monte paid nearly $90 million to settle claims that Barclays, which served as Del Monte’s financial adviser in a buy-out, had conflicting interests in the deal – as it also provided some financing to the buyers. That settlement came after a (different) judge in Delaware found that the bank had “secretly and selfishly manipulated the sale process to engineer a transaction that would permit [it] to obtain lucrative buy-side financing fees…”