by Lisa Swan on March 20, 2012
Conflicts of interest is a hot topic these days, especially when it comes to Goldman Sachs. The firm has been attacked on that issue twice in recent weeks, the New York Times Dealbook notes. One, of course, was from now-ex-Goldman Sachs executive Greg Smith, in an op-ed in the Times’ pages. The other is from the Delaware Court of Chancery, who reviewed a case accusing Goldman of conflict of interest in its advising of the El Paso pipeline company before the business was acquired by Kinder Morgan. This, despite the fact that Goldman owned 19.1 percent of Kinder Morgan and also had two people on the company board. These were known facts, but it is still an issue.
Shareholders for El Paso filed a lawsuit in Delaware to stop the sale. Delaware Court of Chancery Chancellor Leo E. Strine Jr. said that “at this stage, I cannot readily accept the notion that Goldman would not seek to maximize the value of its multibillion-dollar investment in Kinder Morgan at the expense of El Paso, but, at the same time, be so keen on obtaining an investment banking fee in the tens of millions.” Strine also criticized El Paso’s CEO for never telling his board of directors for not telling the board he wanted Kinder Morgan to buy the firm.
However, as Dealbook notes, Strine did not stop the vote of the company’s shareholders to approve the sale, and pointed out that Goldman’s conflicts were known, and may not have been harmful. Of course, with Goldman’s $550 million fine from the Securities and Exchange Commission, they did not disclose conflicts of interest regarding collateralized debt obligations, something Goldman eventually had to acknowledge by saying the CDO “contained incomplete information,”
Peter Henning, author of the article on the subject, wonders what the solution is to this. “Ultimately, the rule of caveat emptor — let the buyer beware — is how conflicts of interest are dealt with on Wall Street,” he writes. If you know the person on the other side of the deal is looking to take you for all your worth, then you will be much more wary about the terms of any transaction.”
He ended by noting that Greg Smith said “If clients don’t trust you they will eventually stop doing business with you,” and said, “Whether that is enough to protect investors is another issue.” Caveat emptor indeed.
Lisa Swan is a Feature Writer for the Compliance Exchange and the Wall Street Job Report. She is also a columnist for The Faster Times and a blogger for Subway Squawkers. Her work has also appeared in the New York Daily News, Yahoo Sports, Huffington Post and the books Graphical Player 2011 and Graphical Player 2010.