It is an axiom of the financial crisis that Goldman Sachs realized before any of the other big banks that the mortgage-backed securities market was going to implode in 2007. Goldman dumped MBS and shorted the market, turning a profit in its mortgage department when every other major financial institution suffered record losses.
If you are a customer of a big bank — let’s say a merchant unhappy about the fees you’re being charged to process credit card transactions — good luck trying to bring claims in federal court when you’re subject to an arbitration provision. As you probably recall, in last term’s opinion in American Express v. Italian Colors, the U.S. Supreme Court continued its genuflection at the altar of the Federal Arbitration Act, holding definitively that if you’ve signed an agreement requiring you to arbitrate your claims, you’re stuck with it even if you can’t afford to vindicate your statutory rights via individual arbitration.
The 2nd Circuit Court of Appeals has been known on occasion to buck the judicial trend of deference to arbitration and champion plaintiffs’ rights to class action litigation. But not if the only justification for classwide litigation is a phantom statutory right. In a notably short and emphatic decision issued Thursday in a closely watched sex discrimination case against Goldman Sachs, a three-judge appellate panel reversed a lower-court ruling that former Goldman managing director Lisa Parisi may pursue a class action despite the mandatory arbitration clause in her employment contract. The appeals court agreed with just about every argument by Goldman’s lawyers at Sullivan & Cromwell, ruling that the bank’s arbitration clause does not preclude Parisi’s statutory rights under Title VII of the Civil Rights Act because she has no private cause of action to claim that her employer engaged in a pattern or practice of discrimination.
Late Friday, Kinder Morgan announced a $110 million settlement with El Paso Corp shareholders who asserted that Kinder’s $21.1 billion acquisition of El Paso was tainted by Goldman Sachs’s involvement on both sides of the deal. You remember the case: As Chancellor Leo Strine of Delaware Chancery Court detailed in a scathing opinion in March, Goldman served as a financial adviser to El Paso even though it simultaneously held a $4 billion investment (a 19 percent ownership stake) at Kinder Morgan. Strine refused to enjoin a shareholder vote on the merger but encouraged plaintiffs’ lawyers to press on with claims for money damages, finding “a reasonable likelihood of success in proving that the merger was tainted by disloyalty.”
Jed Rakoff has bounced back quite nicely, thank you, from his appellate smackdown in the Securities and Exchange Commission’s collateralized debt obligation case against Citigroup. In the unlikely event you’ve forgotten, earlier this month the 2nd Circuit Court of Appeals stayed the SEC’s case before Rakoff, finding a strong likelihood that the government and Citi would prevail in their argument that the judge overstepped his bounds when he rejected their proposed $285 million settlement. Despite the notably critical language in the three-judge panel’s per curiam ruling in the Citi case, Rakoff, a U.S. Senior District Judge in federal court in Manhattan, seems undaunted in his determination to hold the SEC accountable. On Tuesday, he ruled that the agency must disclose documents used to prepare Goldman CEO Lloyd Blankfein for his deposition in the Rajat Gupta insider trading case.
Goldman’s sweep for internal emails containing client insults like “muppet,” a scoop by my Reuters colleague Lauren LaCapra, got lots of well-deserved snark as the bank’s latest too-little-too-late response to Greg Smith’s “Why I Am Leaving Goldman Sachs” op-ed. In case you’re just returning from a vacation in Antarctica, which is pretty much the only way you could have avoided the financial world’s equivalent of Kim Kardashian’s divorce, Smith, a London-based Goldman executive director, said he was sick and tired of the bank’s callous treatment of its clients. “It’s purely about how we can make the most possible money off of them,” Smith wrote in the New York Times. “If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.”
Chancellor Leo Strine of Delaware Chancery Court is thoroughly sick of what he perceives as Goldman Sachs’ disregard for the M&A rules everyone else plays by. His 34-page decision Wednesday in a shareholder challenge to Kinder Morgan’s $21.1 billion acquisition of El Paso Corp is filled with scorn for Goldman’s eagerness to remain an adviser to longtime client El Paso even though Goldman held a $4 billion stake and two board seats at Kinder Morgan. Writing four months after he took Goldman to task for manipulating valuations in the Southern Peru Copper case, Strine used words like “tainted,” “furtive,” and “troubling” to describe the investment bank’s continuing influence on El Paso CEO Douglas Foshee, even after it was supposed to be walled off from the Kinder deal.
Back when former Goldman Sachs director Rajat Gupta’s most pressing problem was the Securities and Exchange Commission’s civil case against him, his defense scored a small victory when the SEC agreed to drop an administrative proceeding against him and brought civil charges in federal court instead. Gupta’s lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel, had fought to have Gupta’s case heard by a federal judge, rather than an SEC administrative law judge, because the rules of evidence in administrative proceedings favor the agency. Among other things, the SEC can admit hearsay evidence, and defendants don’t have the same rights to depose opposing witnesses. Although the SEC can’t seek the same penalties in administrative proceedings as it can in federal court, they can be an effective way for the agency to make a statement about improper conduct.
Grupo Mexico’s lead lawyer, Alan Stone of Milbank, Tweed, Hadley & McCloy, told me Monday that the company was “shocked” by Chancellor Leo Strine’s 106-page Oct. 14 ruling that the company owes $1.26 billion to the shareholders of Southern Peru Copper Company — the second-biggest shareholder derivative award in history.
Lawyers who represent corporations — Sullivan & Cromwell, in Goldman’s case — have a duty to the company. And though CEOs and other high-ranking executives often think their interests are exactly the same as the corporation’s, lawyers have to anticipate a divergence between what’s good for the company and what’s good for its leaders. A company under investigation might be best served by cooperating with prosecutors and turning over (for instance) its lawyers’ interview notes; execs may have conflicting interests. Even if they don’t, lawyers are supposed to avoid even the appearance of a conflict, so as soon as it’s clear that investigators are interested even in just interviewing an individual executive, white-collar defense lawyers will typically advise bringing in separate counsel.
A couple of cases from the last few years drove home that lesson. Proskauer Rose represented Allen Stanford’s Stanford Financial as the Ponzi scheme collapsed. Proskauer partner Thomas Sjoblom was in the room with Stanford Financial’s chief investment officer, Laura Pendergest-Holt, when she was interviewed by the SEC in 2009. Sjoblom told the SEC that he was representing the company, not Pendergest-Holt. But she ended up indicted for lying to investigators and obstructing justice based on that SEC interview. Pendergest-Holt turned around and sued Sjoblom and Proskauer, asserting that she was never told the firm wasn’t representing her. Sjoblom subsequently resigned from Proskauer. (Proskauer’s spokesman didn’t return my call.)