Banks hid 15% loan and margin-call triggers, investors say
As bankruptcy ends, shareholder claims just getting started
As SunEdison Inc.’s bankruptcy winds toward a close, a question lingers about the demise of what was once one of the U.S.’s most promising companies. What role did Wall Street’s biggest banks play?
Goldman Sachs Group Inc. in particular, along with Deutsche Bank AG and Morgan Stanley, were involved in a margin call and a “secret” loan that contributed to SunEdison’s collapse, according to lawsuits brought by dozens of investors including KKR & Co. and Pyramid Holdings Inc. The suits, just getting started, are now the main hope for shareholders wiped out by SunEdison’s reorganization plan approved last week.
They chronicle a series of interactions with lenders -- ones that would eventually culminate in the so-called “Friday Night Massacre” -- when SunEdison’s management ousted several board members allegedly as part of an effort to repay the margin loan.
Goldman, Deutsche Bank and Morgan Stanley declined to comment. Their sides have yet to be told, as the case is still in the early stages. But they have said in court filings that securities law doesn’t require them to disclose all material information, just that which, if absent, would make statements “misleading or untrue.” There was no regulatory requirement that the so-called “secret” loan had to be disclosed, or that more details about the margin loan -- already well-described -- had to be given, they said.
Formerly the largest clean-energy company in the world, SunEdison was a sweetheart of investors in the years leading up to its April 2016 bankruptcy. Poised to capitalize on a wave of interest in green energy, its stock was snapped up by individual investors -- who have since seen their $10 billion in equity go to zero.
While creditors’ claims, including those against directors, have been resolved in bankruptcy, the blame game over SunEdison’s failure lives on. Common stockholders’ outstanding lawsuits allege management misled them about a financial “house of cards” involving SunEdison’s two yieldcos, TerraForm Power Inc. and TerraForm Global Inc. The yieldco structure itself has been questioned as a business model.
The KKR and Pyramid lawsuits assign the blame differently: they say the banks, which had already layered debt onto SunEdison, hid information about its precarious financial state as they passed the risk on to shareholders while earning “handsome” underwriting fees. KKR anchored SunEdison’s $650 million preferred stock offering, and Pyramid bought shares in the $1.5 billion initial public offering of TerraForm Global.
The deals were underwritten by more than a dozen banks, but KKR’s complaint singles out Goldman, Deutsche Bank and Morgan Stanley, saying their later role in a margin call meant they knew, or should have known, about SunEdison’s darkening financial situation.
"People expect Goldman to know what Goldman is doing,” said Andrew Tuch, a professor of Securities Law at Washington University in St. Louis, who isn’t involved in the suit. Securities laws are broad in their requirements to disclose material information, and the banks had an obligation to perform due diligence, he said.
The lawsuits, which also name SunEdison executives for signing off on the deals, are consolidated in Manhattan District Court with those of SunEdison’s stockholders. Holders of the parent company’s common stock likewise name executives and banks in their lawsuits, and say Goldman should have disclosed a conflict of interest that arose from its roles as both as a lender to SunEdison, and a party that benefited from selling shares to the public.
In their defense, the banks said in court papers that the offering documents “clearly described” a relationship SunEdison had with its underwriters, including more than $1.4 billion in financing from Goldman.
In January 2015, Goldman, Morgan Stanley and Deutsche Bank were among five lenders on a margin loan to SunEdison. The $410 million, two-year deal was intended to help fund the $2.4 billion purchase of renewable-energy developer First Wind Holdings, and Goldman was a financial adviser, according to the lawsuits.
While many details about the margin loan were disclosed, a side letter agreement that defined its exact triggers wasn’t, Pyramid said. The TerraForm Power shares pledged to back the loan traded at $32.58 a share when the loan was entered, and had to decline 23 percent before a trigger was exceeded, according to its lawsuit.
The underwriters say enough was disclosed to anticipate when a margin call might be triggered, and that SunEdison didn’t need to give “each and every term” of the loan so investors could know its exact timing or size.
Goldman went on to lend SunEdison more money -- in secret, the lawsuits say. A $169 million loan Aug. 11, 2015, effectively had a 15 percent interest rate, more than five times the average of SunEdison’s existing financing, according to the lawsuits. KKR says it was presumably to cure a $152 million margin call that Goldman, Morgan Stanley and Deutsche Bank made around the same time -- noting that it couldn’t say for sure, because at the time of its November 2016 complaint, no one had revealed when the margin call occurred.
Just four days after the “secret” loan, on Aug. 15, 2015, Goldman “in particular, actively solicited” KKR’s purchase in the preferred-stock offering, on which it was lead underwriter, and acted as its broker-dealer, KKR says. KKR committed to a large chunk of the shares from the start, and eventually bought $157 million worth.
By failing to mention the 15 percent loan and the margin loan’s terms, the underwriters broke securities law, KKR claims.
“The interest rate on the 15 percent Goldman Loan also would have been very revealing to investors of the views of Goldman," one of SunEdison’s most trusted financial advisers, KKR wrote in its suit.
In a February court filing, underwriter’s counsel Shearman & Sterling LLP said that to succeed, the suits against them would have to show that the margin call and Goldman loan “reflected an ‘extreme’ or ‘fundamental’ departure” from SunEdison’s financial condition as described in its Aug. 6, 2015, regulatory filing.
They couldn’t have disclosed the margin call at that time, they add, because it occurred the next day, Aug. 7.
Deutsche Bank and Goldman would go on to help fund the company’s operations in bankruptcy, as secured creditors. According to court records, secured creditors were repaid 100 percent.
The cases are: In re SunEdison Inc. Securities Litigation, 16-02742; Southern District of New York.
— With assistance by Brian Eckhouse, and Joe Schneider