NEW YORK (
) -- A battle emerging between
and a small pension fund in Louisiana signals that a new sheriff is headed to Wall Street - literally and figuratively.
A string of lawsuits filed by the Louisiana Municipal Police Employees Retirement System (LMPERS) target Goldman Sachs and question whether its investment bankers are out for their own interests instead of shareholders. With high stake suits currently in court, LMPERS success may turn to a key deterrent against shoddy Wall Street practices as regulators and legislators struggle to keep beat.
Already, in the largest U.S. deal of 2011,
$21.1 billion acquisition of
, LMPERS won a crucial ruling against Goldman Sachs and its merger advice, in a court case that unveiled "disturbing"
Now the fund is at it again, this time targeting
of Medicare-focused insurer
. As with El Paso, not only is the entire merger at stake - so too is Goldman's sterling reputation as a top Wall Street advisor.
In fact, there's a twist - a $233 million payment due to Goldman outside of M&A fees -- were the merger to stand in courts. The payment, a warrant contract stemming from Goldman's underwriting of Amerigroup's debt, pays out on any merger agreed prior to Aug 13 and equates to roughly half of the bank's second quarter advisory revenue.
LMPERS argues that the payout and Amerigroup's knowing acceptance of Goldman's conflicts, in addition to the company's closed auction process, has shortchanged shareholders.
The contest against Goldman shouldn't be seen in isolation. The fund was one of the first to sue
for a trading loss that stands at $5.8 billion, and it's been involved in nearly 50 shareholder lawsuits since July 2010.
"LMPERS, is, without a doubt, the most prolific filer of shareholder litigation in U.S. history," said a JPMorgan shareholder in court filings, protesting to the expansion of the suit, which is now a class action.
Shareholder lawsuits are often portrayed as nuisance, a sort of stockholder extortion, and as endemic of a litigious culture. LMPERS; however, has won many contests and also uncovered some of Wall Street's dirtiest muck in the process.
Were judges to continue finding in favor of litigation and against banker and C-Suite dealings, small time investors like LMPERS - it holds roughly $1.3 billion in investments - could be a key deterrent.
In the Amerigroup case, Stuart Grant, the leading plaintiff attorney at Grant & Eisenhofer argues that LMPERS is not only acting in accordance with its shareholder rights - the fund is also simply fed up.
While Grant says LMPERS is asking to enjoin the Amerigroup deal so that other competing bidders can enter negotiations, he concedes it's a tough place to put shareholders, who are looking at a big payout. "When you have someone who has a financial interest in the transaction, they have to say 'I can't do this," adds Grant.
If LMPERS has turned to an aggressor in Wall Street litigation, other forces may also be at work.
In July 2010, the fund's actuary more than doubled employer pension contribution rates to 25% from 11%, citing the market downturn and investment losses that increased its unfunded pension liabilities by $382 million, a 12% additional contribution rate. As of 2011, the fund is nearly 60% funded, according to its financial statements. If the fund is going to ask more of sheriffs financially, then bankers should also expect a squeeze.
LMPERS General Counsel Randall Roche said in an August interview with
that the fund takes legal counsel from roughly a dozen firms on its holdings, and that the fund has seen an increase in cases that merit a suit, in recent years.
In its newest case against Goldman, LMPERS is asking that a Delaware court block the deal and re-open Amerigroup's sale process because it alleges advisors were happy to go along with exclusive WellPoint deal negotiations, amid a feeding frenzy of strategic healthcare M&A interest.
The suit alleges that Goldman Sachs stood to gain up to $233 million from the warrant contract if Amerigroup were sold prior to August 13, potentially causing the investment bank to focus on the expediency of a deal over price, in a conflict that's reflected in deal proceedings.
$5.7 billion deal for
Coventry Health Care
signaled that industry giants are opening their purse strings in a post- Affordable Care Act industry
The question is whether Goldman failed to capitalize on industry M&A hunger for Amerigroup leading up to the Supreme Court's confirmation of the Act in June. Also at question is whether Amerigroup's board acted in the interest of shareholders in picking Goldman as its investment banker, in spite of clear conflicts that could outweigh it's advice as a longtime underwriter.
As with El Paso, Goldman was picked in-spite of conflicts only after a second banker joined in financial advisory work,
in the former instance and
in the latter.
While Goldman and Amerigroup decline to comment beyond existing filings and haven't yet filed a court response to LMPERS allegations, the fund's suit already raises questions about conflicts and the overall due diligence in selling the company.
In the suit, LMPERS notes that an unnamed 'Company D' was willing to pay more to Amerigroup shareholders than WellPoint's initial takeover offer and that other suitors "E", "F" and "G" also held deal talks, signaling widespread interest.
Meanwhile an independent assessment on Goldman's $233 million payday given by law firm Skadden, Arps, Slate, Meagher & Flom and co-advisor Barclays - disclosed in an Amerigroup proxy statement - was ineffectual, according to LMPERS.
The assessment cleared Goldman's prospective conflicts because a deal would need to close before Oct 22 for the bank to see any of the millions tied to its existing financial contracts. After Aug 13, the $233 million figure would fall with each passing day.
As Skadden and Barclays took presentations of potential conflicts in March of 2012, M&A interest in Amerigroup was already more than evident. In fact, according to LMPERS' suit, a bidding war looked to be in the cards.
"Beginning in December 2011, several suitors expressed unsolicited interest in entering a potential strategic transaction with Amerigroup," notes LMPERS in its suit. In February, "Company D" met with Amerigroup's chairman and chief executive James Carlson about a deal and in March, companies E, F and G also held discussions with Carlson to "the foundation for future strategic transactions," LMPERs adds.
In late March, with M&A interest already apparent, Goldman was nonetheless hired and Barclays was brought in as a co-advisor, splitting any prospective deal-related fees.
"Representatives of Barclays, Skadden and management of the company discussed that given the current state of the board's deliberations on potential strategic alternatives, uncertainty caused by the United States Supreme Court decision regarding the Affordable Care Act expected in June 2012, and that any transaction would be subject to the receipt of numerous regulatory approvals, although there was no certainty, it would be unlikely that a transaction involving the sale of the company would close prior to October 22, 2012," says Amerigroup in its proxy.
However, when inquiring about Amerigroup's July 9 sale - expected to close in early 2013 - and the terms of Goldman's warrants, the bank appears poised for the $233 million windfall if the deal were to stand as is.
When Amerigroup presented its advsors with a June 1 proposal to enter exclusive negotiations with WellPoint on a sale, LMPERS argues it's no surprise Goldman advised on moving forward.
Nevertheless, Amerigroup's proxy detailing its sale at length does also show a M&A process that took WellPoint's bid from the mid-$80s to $92, in a takeover that came at a 43% premium. That premium is also larger than Coventry Health Care's $5.7 billion takeover.
Still in a shareholder landscape dominated by activists and large pension funds, LMPERS' dogged and oftentimes-successful litigation may be a new check on C-Suite malfeasance.
Were Goldman's advice in Amerigroup's sale to WellPoint to yield similar discovery and judicial findings as those stemming from LMPERS' El Paso suit, it might be cause for investment bankers and executives to think twice before assembling sweetheart deals for everyone but shareholders.
-- Written by Antoine Gara in New York