Goldman Sachs’s Shell Game

The mega-bank has created 61 different off-balance-sheet corporations with help from companies based in the Cayman Islands all of which have the same three-member panel of “independent” directors.

BY DAVID DAYEN, American Prospect, January 8, 2020 AP_19287456846714 rs.jpg

Tyson Slocum has embarked on a crusade the past few months that would make I.F. Stone jealous. The director of Public Citizen’s Energy Program has stumbled into some genuinely novel evidence about how mega-banks cloak their entry into commodity markets.

First, Slocum found associations between JPMorgan Chase and an allegedly non-affiliated entity buying a power station in El Paso, Texas, links that the bank would eventually acknowledge. But Slocum’s discovery regarding Goldman Sachs seems even more revelatory. The banking giant has set up at least 61 different off-balance-sheet entities controlling various investment assets, all of which have the same three-member panel of “independent” directors.

The directors were all leased from “rent-a-director” firms based in the Cayman Islands, a notorious tax haven. “They’re almost like a dating site, choose your director,” says Slocum, who is protesting one of the entities as it requests regulatory approvals at the Federal Energy Regulatory Commission (FERC).

These transparently affiliated shell corporations enable Goldman Sachs to avoid FERC limitations on sales of electric power, bank regulatory requirements around participating in pooled investment funds, merchant banking restrictions, and requirements to add capital in case of losses. “Goldman Sachs has enormous financial and regulatory incentives to keep these entities off the books,” Slocum says. The sham directors fulfill corporate governance rules without having to put the fate of the shell companies in the hands of anyone with independent thought. In other words, it’s a useful and lucrative fiction, manipulating the securities laws to conceal the truth.

Through a spokesperson, Goldman Sachs declined to comment.

THE TRIGGER POINT for Slocum uncovering this scheme was an application submitted to FERC last month by an entity called “Goldman Sachs Renewable Power Marketing” (GSRP), which owns various solar-generation facilities around the country. It operates similar to a private equity fund, pooling money from institutional investors to acquire the solar farms. In order to sell electricity in the United States, GSRP needs sign-off from FERC, what is called market-based rate authority. “The application is pretty routine, 90 percent of the time there’s nothing there,” Slocum explains.

In this case, what caught his eye was a footnote on page 3 of the application, stating that Goldman Sachs Renewable Power is “not affiliated” with Goldman Sachs Group. You’d think Goldman Sachs would file a trademark complaint against an unaffiliated corporate entity using its name. But the linkages go well beyond that.

GSRP’s point of contact on the application, Patrick McAlpine, is a vice president at Goldman Sachs, who lists Goldman Sachs’s address, phone number, and a “” email domain as his contact information. Goldman Sachs Asset Management, McAlpine’s division of the firm, is listed as an “investment manager” for GSRP. Goldman Sachs even owns a stake in GSRP, though it’s claimed to be less than 5 percent.

The non-affiliation, according to the footnote, derives from the fact that “GSRP’s Board of Directors consists of three independent directors, who are independent of The Goldman Sachs Group.” In the application, Goldman Sachs doesn’t name the directors.

Slocum initially filed an objection, arguing that Goldman Sachs and GSRP are clearly affiliated. FERC restricts trading among affiliates, seeking to avoid a situation where, for example, Goldman Sachs effectively sells power to itself and pockets the receipts at the expense of GSRP’s investors. “Goldman Sachs is one of the largest energy traders in North America,” he says. “You can conceal a bunch of things with affiliates, and FERC has restrictions on that.” By treating GSRP as a non-affiliate, “Goldman would get to evade all that.”

It’s a useful and lucrative fiction, manipulating the securities laws to conceal the truth.

Over the holidays, Slocum became more interested in identifying the three independent directors. He found a “Form D” that GSRP filed with the Securities and Exchange Commission (SEC), a requirement for pooled investments. The form lists GSRP as a Delaware company, again with the same address and phone number as Goldman Sachs. But it names the three directors: Andrew Galloway, Andrew Johnson, and John Lewis.

All listed addresses in the Cayman Islands, as well as their respective corporate affiliations with companies based there: ICG Management Ltd (Galloway), Circumference FS (Johnson), and Highwater Ltd (Lewis). Slocum started searching the SEC’s databases to learn if these directors had other positions within companies.

What Slocum found even shocked him. Galloway, Johnson, and Lewis are listed as “independent” directors for 60 other companies, all of which list their “principal place of business” as 200 West Street in New York City, the headquarters of Goldman Sachs. The entities have names like “Anchorage Illiquid Opportunities V” and “Global Private Opportunities Partners III.” Many of them have the names of other large private equity firms, like BlackstoneAres Capital Management, and KKR, suggesting they were joint private equity funds where Goldman and its partners secured investors. Several of them are named generic things like “Private Equity Co-Investment Partners II,” “Private Equity Managers (2017),” and “Private Equity Managers (2018).”

THESE LOOK exactly like shell companies, corporate fictions built to park assets and evade rules. The massive leak of the Panama Papers in 2016, memorialized in the Netflix film The Laundromat, revealed the inner workings of how wealthy individuals and law firms conspire to generate shell companies, mainly to facilitate offshore tax evasion. In this case, we have at least 61 shell companies, all created by Goldman Sachs, using the same three people as “independent” directors who allegedly control operations.

Experts describe this type of setup as depressingly normal. “This arrangement is epidemic, like the plague,” says James D. Cox, a law professor at Duke University who specializes in securities law. Banks and mutual fund companies that create investment vehicles must adhere to the Investment Company Act of 1940, which states that at least 40 percent of all directors of the funds must be independent. “Let’s say they have a bunch of funds, and they have pretty much the same board for every one,” says Cox. “The money they get, $700 or $900 a meeting, on 61 of these boards, that’s a good day’s work.”

Such an arrangement has been challenged occasionally in court, with plaintiffs arguing that the same directors on so many boards cannot possibly be independent. But in Migdal v. Rowe Price Fleming International in 2001, the Fourth Circuit Court of Appeals ruled that directors that served on 38 boards of T. Rowe Price funds met the criteria of the 1940 Act. “But to say that they’re independent, any claim that they’re disinterested is a farce, quite clearly,” Cox adds.

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Making this even stranger, the Cayman Islands firms associated with Galloway, Johnson, and Lewis all advertise themselves as what could be called “rent-a-director” shops. ICG, which stands for “Independent Corporate Governance,” freely states that it “was established in 2006 to focus on providing independent director services for offshore funds.” It has a roster of three directors, including Galloway, who is termed a “director and principal” of the company.

Circumference RS says on its website that it is “a leading provider of professional and fiduciary services for major institutional and private clients.” Independent directors are one of their “support services.” Johnson is a lead director of the company. He has a bachelor’s degree in accounting from Florida State University, and “over twenty years experience in the offshore financial services industry.”

Highwater pitches its ten directors as giving “absolute independence,” on a website that does kind of resemble, only for corporate offshore services. Lewis is a partner at Highwater. The company also has a fine-looking art collection.

Galloway and Johnson did not respond to requests for comment via phone and email.

Experts consulted by the Prospect hadn’t heard of these “rent-a-director” shops, though it didn’t surprise them. “This is what the Caymans specialize in, independent contractors for all your needs for regulatory arbitrage,” says Saule Omarova, a professor at Cornell University. She related it to the “rent-a-bank” scheme payday lenders use to evade interest rate caps.

“This is what the Caymans specialize in, independent contractors for all your needs for regulatory arbitrage.”

These “independent” directors allow Goldman to avoid a finding of ownership and control in a “covered” investment fund under the Volcker Rule, designed to prevent banks from making risky investments with depositor funds. Under Section 23A of the Federal Reserve Act, there are additional curbs on bank activities with affiliates, so maintaining the fiction that GSRP and the others are non-affiliates sidesteps that. And there are “merchant banking” restrictions against day-to-day operations, which the independent directors also ameliorate.

The bank regulatory relief combines with the avoidance of FERC regulations and restrictions around trading between affiliates, making the corporate shells quite worthwhile.

Perhaps the biggest benefit is that the assets of these 61 entities go off the books, separate from Goldman Sachs. That means Goldman doesn’t have to account for the assets or take the losses if they drop dramatically in value. Just hire the same three flunky executives over and over, and make billions in assets disappear. “They’re playing this legal shell game with federal regulators,” says Slocum. “They’re daring regulators in a game of chicken.”

Even if this satisfies the letter of the law around independent director requirements, the whole enterprise looks broken. “The governance is absolute nonsense, a pretense of legal entities,” says Omarova, who adds that the expected lack of oversight from the rent-a-directors invites abuse of the investment pools and potential fraud upon the investors.

Combined with JPMorgan’s similar maneuver to claim an unaffiliated relationship with the purchaser of El Paso Electric, it looks like a considered financial industry strategy to create on-paper vehicles to obscure holdings. “It really worries me that Goldman Sachs and JPMorgan are doing this,” Omarova says. “It also shows that we really need to have a national plan for building public infrastructure. Otherwise we’re stuck with byzantine and incomprehensible structures.”

Slocum has asked FERC to reject GSRP’s application and hold an evidentiary hearing to investigate Goldman’s shell companies and the Cayman Islands independent directors. Among other things, he wants to know how much Galloway, Johnson, and Lewis receive in compensation for their board service, how many public and private Goldman Sachs–created companies they serve on as directors, and the full relationship between GSRP and Goldman Sachs.

“It’s a little surprising to me that a firm like Goldman would use something like this, hiring some schlep and putting them on who knows how many boards,” Slocum says. As he writes in his petition to FERC, “Goldman Sachs’ use of such an absurd ‘rent-a-director’ service is worsened by its irresponsible overreliance on it.”CORPORATE POWERENERGY & THE ENVIRONMENTCORPORATE GOVERNANCEGOLDMAN SACHSBANKS

DAVID DAYEN David Dayen is the executive editor of The American Prospect. His work has appeared in The Intercept, The New Republic, HuffPost, The Washington Post, the Los Angeles Times, and more.

Tyson Slocum is director of Public Citizen’s Energy Program, covering the regulation of petroleum, natural gas and power markets. Tyson promotes an equitable energy transition that provides distributed renewable energy generation and sustainable transportation solutions for working families. Tyson serves on the U.S. Commodity Futures Trading Commission’s Energy & Environmental Markets Advisory Committee, and frequently intervenes before the Federal Energy Regulatory Commission representing the interests of household consumers. Tyson presents his research in congressional testimony and appears regularly in the media. Tyson is a member of the faculty at the University of Maryland Honors College, where he teaches energy and climate policy. Prior to joining Public Citizen in 2000, Tyson served as an analyst with the Institute on Taxation & Economic Policy. Tyson is an expert in issues dealing with regulation and deregulation of energy markets, the impact of mergers and lax regulations over electricity, petroleum and natural gas and federal energy legislation.