Goldman Sachs and Conflicts of Interest

Goldman Sachs often disregards any conflicts of interest it may have. The following piece gives us an idea of how Goldman creates these conflicts by having a dual role in an acquisition offer by being both an investor and an adviser.

Kinder Morgan's El Paso Buyout Tainted by Conflicts, Lawyer Says
By Jef Feeley - Bloomberg Businessweek

Feb. 10 (Bloomberg) -- Kinder Morgan Inc.’s proposed $21.1 billion buyout of rival pipeline operator El Paso Corp. was tainted by Goldman Sachs Group Inc.’s conflicting interests in the deal and should be barred, a lawyer for El Paso investors said.

Goldman Sachs, which holds a 19 percent stake in Houston- based Kinder Morgan, improperly served as an adviser to El Paso on the acquisition offer, said Mark Lebovitch, a lawyer for pension funds from Louisiana, Florida and New York that sued over the deal.

“If there was ever a conflict that can’t be neutralized, this is it,” Lebovitch told Delaware Chancery Court Judge Leo Strine yesterday at an injunction hearing in Wilmington. “The word ‘conflict’ just doesn’t do it justice.”

Strine said he will rule by March 6 on whether the buyout can proceed. During yesterday’s almost six-hour hearing, Strine said evidence in the case raises questions about whether “there were powerful, unchecked conflicts of interest” that played a role in the El Paso buyout.

The business practices of Goldman Sachs, the fifth-largest U.S. bank by assets, have been criticized during the past two years after the New York-based company agreed to pay $550 million to resolve government claims that marketing materials about investments linked to subprime mortgages had “incomplete information.”

Largest Penalty

It was the largest penalty ever levied by the U.S. Securities and Exchange Commission against a Wall Street firm. Goldman Sachs also faced questions from politicians and labor unions about its compensation system after getting taxpayer aid during the financial crisis.

“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,” Charles Elson, a finance professor at the University of Delaware who runs the school’s Weinberg Center for Corporate Governance, said in an interview Feb. 8.

Lawyers for the pension funds contend in court papers that Goldman Sachs has long-standing ties to Kinder Morgan, helping Richard Kinder, the firm’s chief executive officer, take the Houston-based pipeline operator private in 2006.

Goldman Sachs, in addition to the stake in Kinder Morgan, has its designees in two of the company’s board seats, the fund’s lawyers say. Last year, the investment bank reaped millions of dollars by leading Kinder Morgan’s initial public offering, they said.

El Paso Advice

Goldman Sachs also advised El Paso over the years, the investors’ lawyers said. When Kinder approached the rival pipeline company about a buyout last year, El Paso executives called in Goldman Sachs as an adviser.

El Paso’s board ultimately agreed to Kinder’s bid, which includes both cash and stock and provides a 37 percent premium to shareholders, officials for the company said last year. El Paso investors contend the offer, valued in court papers at $25.91 a share, was too low.

Lebovitch told the judge yesterday that Goldman’s dual roles as investor and adviser in the El Paso deal tainted the pipeline company’s consideration of Kinder Morgan’s offer.

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