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Goldman Sachs faces accusations it cheated another investment bank client

Key Points
  • Goldman took advantage of client United Natural Foods while advising it on a $2.9 billion takeover last year, according to a new lawsuit.
  • United Food is seeking to recoup roughly $200 million in fees and interest it says were unearned and several hundred million dollars more related to derivatives. 
  • Goldman will “vigorously defend” itself against United Food’s accusations, which are “entirely without merit,” according to a spokeswoman.
David Solomon, Goldman Sachs
Patrick T. Fallon | Bloomberg | Getty Images

Goldman Sachs is being accused of bilking a corporate client who hired the investment bank to advise it on a $2.9 billion takeover last year.

The bank put its own financial interests ahead of client United Natural Foods, resulting in about $200 million in unearned fees or interest paid in the deal, the food-delivery company said in a suit filed Wednesday. Goldman had advised United Natural – a top distributor to Whole Foods – on its July 2018 deal to purchase wholesaler Supervalu.

"We expected our extremely well-paid transaction advisors to provide ethical counsel and unbiased support around this landmark acquisition, not leverage their positions to pursue larger profits for themselves and other clients at our expense," Steve Spinner, CEO and chairman of United Food, said in a statement.

The lawsuit comes at a delicate time for Goldman. The bank is under international scrutiny for helping Malaysia raise money for a $6.5 billion investment fund known as 1MDB. Instead of helping the nation, at least $4.5 billion was plundered from the fund by a disgraced Malaysian financier with the help of ex-Goldman partner Tim Leissner. An area of focus is the $600 million in fees the bank earned on three deals tied to 1MDB, an amount that outsiders have called excessive.

The New York-based investment bank intends to "vigorously defend" itself against United Food's accusations, which it said are "entirely without merit," according to a spokeswoman. Bank of America is also a defendant in the suit; a spokesman for the lender declined to comment.

United Foods is seeking to recoup the roughly $200 million in fees and interest it says were unearned as well as several hundred million dollars more related to Supervalu credit default swaps, according to a person with knowledge of the case.

Credit default swaps

Specifically, United Foods alleges that Goldman misappropriated $51.9 million in fees from a roughly $2 billion financing loan the bank had arranged. The client also paid $140 million in extra interest on the deal because Goldman failed to properly syndicate the loan to clients, according to the suit.

Further, United Foods said Goldman convinced it to allow its takeover target to become a co-borrower on the loan rather than retiring its debt. That meant that about $470 million in credit default swaps related to Supervalue debt suddenly ballooned in value, which benefited Goldman's hedge fund clients, according to the suit.

But the terms of the financing deal were agreed upon by United Foods, which had legal representation, according to a person with knowledge of the bank's position.

Goldman had to structure the financing the way it did to get lenders to participate, this person said. Markets began to become less receptive to such deals in the time ahead of an October deadline, and United Foods and Supervalu earnings disappointed when Goldman was attempting to market the deal.