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Goldman has gotten tangled up in a web of conflicts where it provided investment advice to a target company, El Paso Corporation, while holding an investment interest in the acquiring company, Kinder Morgan.  Andrew Ross Sorkin reports on the resulting litigation, As An Adviser, Goldman Guaranteed Its Payday.

Goldman apparently argues unsuccessfully that it had disclosed the conflict to El Paso and arranged for a second, independent bank, to advise El Paso.

In the current investment and business environment the concept of disclosure reigns supreme.  As investigators, lawyers and journalists pour through the all of the various claims generated out of the recent mortgage crisis, often the question is whether certain investments or processes were effectively disclosed.

Disclosure, however, is a securities law concept.  When it comes to fiduciary relationships and ERISA, disclosure doesn’t cut it.

ERISA is very clear.  Conflicts of interest are not tolerated. Fiduciaries are prohibited from acting on behalf of any party whose interests are adverse to the interests of a plan.  This rule is not some obscure or technical rule within ERISA.  Instead, it is the cornerstone of ERISA.

Violation of this principle constitutes a “prohibited transaction”  which can give rise to penalties and fines.

The economy may be gathering a little steam, and the banks may be on a more solid footing than they were a few years ago, however, trust in the “system” is sorely lacking.  Just watch the political news every night.

We need players in the financial and capital markets who understand that there is no justification for conflicts of interest.  The system needs professional who are trusted and who will act in the best interests of their clients.

 

 

 

2 Responses to “Conflicts of Interest Can’t Be Tolerated”

  1. gold price says:

    We need players in the financial and capital markets who understand that there is no justification for conflicts of interest. The system needs professional who are trusted and who will act in the best interests of their clients.

  2. Viewed from a broader perspective, the current controversy over social or economically targeted investing and the extent of ERISA’s constraints on private pension funds is simply the latest in a series of skirmishes. In 1979, for instance, the Employee Benefit Research Institute sponsored a policy forum to outline and debate critical issues. At that forum James Hutchinson and Charles Cole divided investment policies into three categories: totally neutral, so- cially sensitive, and socially dictated.(37) By definition, the first is irrelevant to social investing. In socially dictated investing, the third category, a fiduciary who sacrifices traditional investment quality or undertakes investments “which cannot clearly be related to the interests of plan participants and beneficiaries in their capacity as such” runs the risk of being labeled imprudent and of breaching his fiduciary duty of loyalty. Socially sensitive investing becomes the only candidate for close inspection.

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