Suits Accuse Goldman Of Conflicts In Deals

Goldman Sachs Group Inc. has been sued by shareholders of El Paso Corp. for advising the company’s board to abandon a spin-off and instead sell itself cheaply to Kinder Morgan Inc., a deal that benefited Goldman Sachs, sister news service Reuters reported. Kinder Morgan, backed by The Carlyle Group and GS Capital Partners LP, the private equity arm of Goldman Sachs, reached a deal this month to buy El Paso for $21 billion in cash, stock and warrants, combining the two largest natural gas operators in North America.

While El Paso shareholders received a 37 percent premium to its market close prior to the deal, numerous shareholders have sued over the inclusion of warrants to pay for the deal and what they consider a low valuation, among other issues. Goldman Sachs was sued in Delaware’s Chancery Court for its conflict of advising the board to accept a “low-premium” deal with Kinder Morgan, in which Goldman Sachs owns nearly 20 percent.

As part of the Kinder Morgan deal, El Paso also abandoned a previously announced a plan to spin off its exploration and production business to shareholders. “Goldman Sachs earned larger advisory fees than if El Paso had consummated the spin-off, and Goldman Sachs stands to see its 20 percent investment in Kinder Morgan increase in value,” said the complaint.

Goldman Sachs declined to comment.

The lawsuit by a retirement fund for Louisiana police also names as defendants Kinder Morgan and the board of El Paso and seeks an injunction to block the closing of the deal. The two companies have said they expected it to close early next year. The lawsuit seeks class action status.

Capmark Financial Group Inc., a large commercial real estate lender that emerged from bankruptcy in September, also sued Goldman Sachs to recover $147 million it said the bank obtained by taking advantage of conflicts of interest. The complaint, filed in U.S. District Court in Manhattan, arose out of Capmark’s $1.5 billion secured financing facility obtained in May 2009, five months before its Chapter 11 filing, from Goldman and other lenders.

Capmark said Goldman received $147 million to reduce the size of an unsecured loan it made in 2006, when several Goldman affiliates and other private equity investors bought a 75 percent stake in Capmark. Goldman later installed one of its managing directors, Bradley Gross, to sit on Capmark’s board.

“Despite these conflicts and close connections—indeed, as a result of the influence and insider status that its multiple simultaneous roles created—Goldman Sachs actively and directly participated in internal meetings and discussions that led to the secured credit facility, which gave it preferential treatment as a creditor,” Capmark said.

Michael Duvally, a Goldman spokesman, declined to comment.

Capmark said its reorganization plan gave ownership of the company to lenders and bondholders, and gave it the right to sue Goldman to recover “preferential payments” made in the months leading up to the October 2009 bankruptcy.

Prior to its 2006 sale to Goldman Sachs and Kohlberg Kravis Roberts & Co., Capmark had been known as GMAC Commercial Holdings Corp. Capmark’s bankruptcy petition showed that the Horsham, Pa.-based company had $20.1 billion of assets and $21 billion of debts as of June 30, 2009.

(Jonathan Stempel is a correspondent for Reuters in New York; with additional reporting by Reuters staff.)