DealLawyers.com Blog

Recently, the WSJ ran this article:

Goldman Sachs Group Inc. is considering strengthening internal rules on disclosure to clients of bankers’ financial holdings, after being criticized in a recent court opinion because of a deal maker’s potential conflict of interest in a large transaction. Goldman’s review–and similar initiatives by some of its rivals–could provide companies with greater transparency on the financial interests of the bankers they hire to advise on deals. In a statement to The Wall Street Journal, Goldman said it was reviewing its “policies and procedures with the goal of strengthening them.”

Other Wall Street banks, including Barclays PLC’s Barclays Capital, Bank of America Merrill Lynch and Citigroup Inc., are also looking at their processes for managing potential conflicts when getting hired on deals, in an effort to err on the side of caution especially given the heightened scrutiny on the issue, said people familiar with the matter. The concerns emerged after a Delaware judge said in a Feb. 29 opinion that the $21.1 billion proposed sale of El Paso Corp. to natural-gas pipeline operator Kinder Morgan Inc., announced last year, was riddled with potential conflicts of interest. Among the conflicts, the judge said, was the $340,000 stake in Kinder Morgan of a main adviser to El Paso, Stephen Daniel, Goldman Sachs’ top energy banker. Goldman Sachs, which was aware of Mr. Daniel’s investments according to a person familiar with the matter, said in its statement: “We regret the El Paso Board wasn’t aware of the investment.” The bank didn’t make Mr. Daniel available for comment and he didn’t respond to requests for comment.

One measure being studied by at least three banks is requiring bankers to disclose all of their stockholdings to companies seeking to hire them on deals.
Many bankers said they consider personal stockholdings a “common-sense” disclosure. As a result, conflicts due to a financial adviser’s personal holdings rarely become a problem, the people added.

But in the wake of the Delaware business court’s opinion, “all the banks are thinking about the very issue,” Kevin Genirs, the general counsel of Barclays Capital’s investment banking division, said at an industry conference last week. “Bankers will now self-disclose if they own any amount of shares,” said a lawyer for a major bank, describing the new attitude as “super-conservative. We’ll disclose anything we find and we’ll pass the ball to the company or its counsel and say, you decide what you want to do.” The focus on banks’ potential conflicts of interest comes at a time of heightened interest in Wall Street’s practices from regulators, politicians and the general public. Goldman in particular has been in the limelight, partly due to an opinion piece this week by a departing employee criticizing its culture. Goldman said the account didn’t reflect the firm’s values or culture.

Law firms too are taking note of the banker conflict issue. One senior banker at a major Wall Street firm said that since the El Paso opinion, lawyers for companies involved in takeover talks have begun requiring that banks reveal, at the time of getting hired, whether deal makers own shares in the company on the other side of the deal. Most major Wall Street banks, such as Bank of America, Barclays, J.P. Morgan Chase & Co. and Morgan Stanley, already have rules or guidelines that forbid senior industry and M&A bankers from directly owning or trading securities of companies in sectors or clients they cover, people familiar with the matter said.
But despite the safeguards at many banks, some employees can end up owning stocks in the sectors they cover because through the course of their careers, they change their firms and coverage areas, ending up with “legacy” holdings, people familiar with the matter said. That is one reason for conflict checks.

Junior bankers at most banks are required to disclose their holdings when they are brought into a deals team to work on a transaction, people familiar with the matter said. If a banker does have a potential conflict, either that banker wouldn’t be allowed to work on the deal, or the matter would be disclosed to clients, the people added.

The El Paso opinion has also prompted some banks to discuss whether they need to adjust how they track bankers’ financial holdings, for example possibly making their information-gathering more frequent or even real time. But doing so, they say, could be logistically challenging. Rather than set disclosure thresholds based on the quantity of stock owned or the seniority of the banker, a few banks are contemplating disclosures of all amounts and at all levels, people familiar with the matter said.

In the El Paso matter, Mr. Daniel of Goldman owned $300,000 of shares in Kinder Morgan Management LLC, a publicly-traded entity related to Kinder Morgan, a person familiar with the matter said. Mr. Daniel has owned the stake since 2003, and Goldman approved it because he focused on the “upstream” or oil exploration and production side of the industry, and Kinder was a pipeline operator in the “midstream” of the industry, the person said. Given this ownership, the outcome of talks between Kinder Morgan and El Paso would have had an effect on Mr. Daniel’s financial interest in Kinder Morgan, the person said.
The remaining $40,000 was in a Goldman’s buyout fund GS Capital Partners. Mr. Daniel had no control over the fund’s choice of investments, the person added.