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.
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