We recently noted the controversy over Goldman Sachs ostensibly conflicted role in Kinder Morgan’s efforts to buy the El Paso Corporation.

A shareholders suit charged that Goldman Sachs’ role led to an undervalued offer, as Goldman Sachs “was the long-time banker to Kinder Morgan and had a huge stake in the company via its private equity unit,” while also working as an advisor to El Paso. Now comes word of another deal in which Goldman sachs’ conflicted status has generated controversy.

Deal Journal notes that,  “The bank was hired as one of two financial advisers to Illumina despite having an enormous derivative position in Illumina stock that dwarfs the size of its advisory fee.”

Can a bank provide object advice in such a situation? Illumina apparently had its eyes wide open.

A filing shows that "Illumina’s management and its board, in deciding whether to retain Illumina to advise it on Roche’s offer, considered Goldman’s interest in its stock at least four different times, including when Goldman proactively raised it on December 14 on its first call on the deal."

It also hired Bank of America to review whether Goldman Sachs interest in the company. The position stems from complex transactions that were inked years before deal talks got underway. The derivatives that Goldman Sachs ended up with stand to be quite lucrative for the bank if a deal is inked; Illumina would have to pay to $275 million to cancel various warrants. To hedge its risks, Goldman Sachs also opened a large short position.

Do these transactions disqualify Goldman Sachs? No.

"But here is where it could make a difference: Roche’s strategy to get its takeover done includes seeking to replace a majority of the Illumina directors. The amounts involved in the Goldman derivative position are so eye-popping that they could make great fodder for a proxy fight.  Roche could try to make the case that Illumina’s directors are not being guided by disinterested judgment but by Goldman’s clouded judgment.  Roche could try to create doubt among shareholders as to whether the incumbents can make the right decisions."

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Goldman Sachs “shameless” in deal conflict