Steffy: Goldman Sachs worked both sides in El Paso deal

A lawsuit claims that Goldman Sachs' involvement steered El Paso into Kinder Morgan's arms for a lower price than the company was worth. A lawsuit claims that Goldman Sachs' involvement steered El Paso into Kinder Morgan's arms for a lower price than the company was worth. Photo: Richard Drew Photo: Richard Drew Image 1 of / 1 Caption Close Steffy: Goldman Sachs worked both sides in El Paso deal 1 / 1 Back to Gallery

Wall Street wins again.

That's the inevitable conclusion that emerges from allegations raised by El Paso Corp. shareholders who oppose the company's $21 billion takeover by Kinder Morgan.

In court documents, it becomes clear that while the deal may benefit all shareholders, the real benefactor is Goldman Sachs, which deftly worked both sides of the transaction.

Pension funds and other shareholders filed suit in Delaware Chancery Court last year, claiming among other things that Goldman's involvement steered El Paso into Kinder Morgan's arms for a lower price than the company was worth. A judge heard arguments in the case last week.

For several months before the Kinder Morgan offer emerged, Goldman advised El Paso on a proposed spinoff of the pipeline company's exploration business. Suddenly, Kinder Morgan offered to buy El Paso outright.

That, the shareholders contend, wasn't a coincidence.

Goldman was part of the team that took Kinder Morgan private in 2007, and it was the lead underwriter for the company's public offering a year ago, collecting about $950 million from stock it sold in the offering, the lawsuit claims. Goldman's private equity funds still hold 19 percent of Kinder Morgan's stock, and two Goldman representatives sit on the company's board. Not surprisingly, Goldman agreed to vote its shares in support of the deal, according to the lawsuit.

"El Paso has relied upon advice from a financial adviser who is beholden" to Kinder Morgan, the lawsuit claims.

A couple years ago, the Securities and Exchange Commission accused Goldman of similar duplicity. In that case, the investment bank sold investors mortgage securities that had been selected by a hedge fund.

What Goldman didn't tell its clients, the SEC claimed, was that the hedge fund chose investments it was betting would decline in value. Goldman quickly settled the claims for $550 million, without, of course, admitting or denying wrongdoing.

In the El Paso case, investors claim that by orchestrating the Kinder Morgan buyout, Goldman nabbed bigger advisory fees than it would have on a spinoff of El Paso's exploration business. In all, Goldman is set to collect fees of about $20 million, according to deal documents compiled by Bloomberg.

More for the CEO?

Lawyers for the pension funds at last week's hearing also questioned a private discussion in which they claim El Paso chief executive Doug Foshee approached Kinder Morgan's Rich Kinder about a management-led buyout of El Paso's exploration business as a side deal to the Kinder Morgan acquisition, Bloomberg News reported.

Foshee never revealed that conversation to El Paso's board, shareholders claim, and because he stood to gain from it, the buyout enhanced Foshee's incentive to sell El Paso on the cheap without seeking other offers, the shareholders claimed at the hearing.

If the merger deal goes through and Foshee leaves, he stands to receive a severance package of almost $34.5 million, which includes more than $8.5 million in cash and the rest in stock, according to the company's regulatory filings.

At last week's court hearing, Kinder, Goldman and El Paso all said they took appropriate steps to mitigate any potential conflicts in the deal, and noted that a second adviser, Morgan Stanley, was later brought in. Spokesmen for both Houston companies and the investment bank declined to comment this week.

Judge has concerns

The El Paso takeover isn't expected to close until June, and El Paso shareholders won't vote on it until early next month, about the same time the Chancery Court judge, who said he had significant concerns about the potential conflicts in the case, expects to render a decision.

But Goldman's role in the deal is a reminder of how, despite hundreds of pages of reform law, Wall Street remains unchecked in its ability to make money at everyone else's expense. Goldman, after all, wins no matter what. If the merger fails, Goldman will still have its millions in fees. It's the shareholders who will lose.

Loren Steffy, loren.steffy@chron.com, is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. His blog is at http://blogs.chron.com/lorensteffy. Follow him on his Facebook fan page and at twitter.com/lsteffy.