By Gretchen Morgenson 

Goldman Sachs Group Inc. put its own interests ahead of that of a corporate client in advising on a wholesale-food company acquisition last year, a new lawsuit alleges.

The suit, filed by United Natural Foods Inc., accuses Goldman of improperly extracting more than $200 million in advising the Providence, R.I., food distributor on its $3 billion acquisition of grocery chain Supervalu Inc.

At issue is a roughly $2 billion financing loan Goldman arranged for United Natural Foods on the deal. The company alleges that Goldman arranged the financing in a way that hurt United Natural Foods but benefited the financial firm and its hedge-fund clients that had placed bets in the credit-default swap market against Supervalu. The company also accuses Goldman of taking advantage of the deal's provisions to extract more money from United Natural Foods.

A Goldman spokeswoman said the firm "believes that these claims are entirely without merit. We intend to vigorously defend ourselves against these accusations."

The suit mirrors questions raised by Congress and others after the financial crisis about Goldman's duty to clients. Goldman, which paid a $550 million penalty over a specific deal called Abacus, says it has since changed its operations and disclosures. The suit also raises fresh concerns about the potential for manipulation in the $10 trillion market for credit-default swaps, which are contracts designed to reduce the risk of losses when an entity defaults on its debt.

The suit, filed Wednesday in a New York state court, provides a glimpse of the allegedly aggressive tactics Goldman took with United Natural Foods. When the company, which also had legal representation, objected to changes Goldman made in loan terms related to the deal, for example, it alleges that Stephan J. Feldgoise, Goldman's co-head of mergers for the Americas, warned the company that "things would get ugly." Through the spokeswoman, Mr. Feldgoise declined comment.

Goldman currently is embroiled in controversy over outsize fees it generated underwriting bonds issued by 1MDB, a Malaysian sovereign-wealth fund at the center of an international bribery scandal. Last month, prosecutors in Malaysia filed criminal charges against Goldman, citing securities-law violations. Goldman has denied the 1MDB allegations and is fighting them.

Goldman's mergers-advisory unit and its bank were hired to work on the United Natural Foods deal. The company initially agreed to pay Goldman's advisory unit $11.4 million and the bank unit $14.5 million, plus an additional $5.3 million for being lead arranger on the financing loan. If Goldman was unable to syndicate the loan, it and other lenders, including Bank of America which was also named in the suit, would have to fund the loan themselves. A Bank of America spokesman declined to comment.

Originally, the deal called for United Natural Foods to retire Supervalu's $1.6 billion in debt. To investors who had bet against Supervalu in the credit-default swap market, this was disastrous -- they stood to lose big if the debt was extinguished. Some $470 million in Supervalu credit-default swaps was outstanding at the time of the deal, the suit said.

Instead of retiring the Supervalu debt, Goldman persuaded United Natural Foods to add Supervalu as a co-borrower on the loan, the suit said, keeping Supervalu CDS trades alive.

Only after the deal closed, the suit contended, did United Natural Foods learn that Goldman had hedge-fund clients holding the Supervalu CDS, which doubled in value when the deal terms added Supervalu as a co-borrower.

Some of those same hedge-fund clients also bought into the United Natural Foods financing loan, the suit alleged.

As a result, United Natural Foods said in the suit, those holders now have an incentive to "manufacture" a default on the United Natural Foods debt to win their CDS bets against the company -- though no hedge-fund holder has done so.

Such so-called manufactured defaults are becoming more common in the CDS market, raising questions about the reliability of these instruments. Last year, the Commodity Futures Trading Commission said in a public statement that intentional defaults, created to generate profits on a CDS trade but unrelated to a company's financial health, could constitute market manipulation.

The suit against Goldman also alleges that the firm used its control over the financing to extract more money from United Natural Foods. A person familiar with Goldman's thinking said that structuring the financing as it did was necessary to get lenders' participation. Under the financing provisions, Goldman could hike the loan's interest rate by 1.25 percentage points to make it more attractive to investors.

Another provision allowed Goldman to claim an additional $40.5 million from United Natural Foods if it didn't have a full 15 days to fund the loan and was unsuccessful in raising the money.

Goldman marketed the loan against an Oct. 15 deadline, during a period of turmoil in the stock market. A few days before the deadline, the suit said, Goldman's Mr. Feldgoise told United Natural Foods that Goldman was having difficulty attracting investors and asked for concessions.

When United Natural Foods refused, the suit said, Mr. Feldgoise told United Natural Foods' Chief Executive Steven Spinner that his company had forced Goldman into "full risk-mitigation mode."

Goldman then raised the interest rate on the loan by 1.5 percentage points, adding $183 million in interest costs over the life of the loan. The firm also contended there was a second marketing period on the loan, allowing it to add $40.5 million to the deal's costs, which Goldman withheld from the deal proceeds.

In the suit, United Natural Foods alleged that Goldman "consolidated its command over all aspects of the transaction, enabling it to ensure its own profits to the detriment" of United Natural Foods and its shareholders.

United Natural Foods expected Goldman "to provide ethical counsel and unbiased support" of the deal, said Mr. Spinner, "not leverage their positions to pursue larger profits for themselves and other clients at our expense and ongoing damage."

Write to Gretchen Morgenson at gretchen.morgenson@wsj.com

 

(END) Dow Jones Newswires

January 30, 2019 19:27 ET (00:27 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
United Natural Foods (NYSE:UNFI)
Gráfico Histórico do Ativo
De Fev 2024 até Mar 2024 Click aqui para mais gráficos United Natural Foods.
United Natural Foods (NYSE:UNFI)
Gráfico Histórico do Ativo
De Mar 2023 até Mar 2024 Click aqui para mais gráficos United Natural Foods.