Financial Regulatory Forum

Goldman Sachs: Shareholder Revolt Spreads Where the SEC Has Yet to Tread

April 28, 2010

Where the SEC goes, plaintiffs’ lawyers are sure to follow. But in the case of Goldman Sachs, they’ve charged ahead straight into the C-suite, alleging far broader levels of misdeed than the SEC’s limited charges surrounding an individual transaction, writes Erik Krusch of Thomson Reuters Westlaw Business Currents. (Click here for further details.) 
Goldman Sachs was charged by the Commission in the case of SEC v. Goldman Sachs and Fabrice Tourre with fraudulently structuring and selling a synthetic collateral debt obligation (CDO). Now plaintiffs’ lawyers are angling for a piece of the Goldman pie, but unlike the SEC, these shareholder suits sport an entirely different caliber of co-defendants.
The SEC’s pursuit of Goldman has topped the headlines for the past week. Goldman has been dogged by disclosure issues on at least two fronts: the ABACUS 2007-AC1 transaction and a Wells Notice regarding ABACUS that the bank later received. The SEC’s case against Goldman turns on the way that the bank disclosed the involvement of hedge fund in the ABACUS 2007-AC1 structuring to other deal parties. The SEC alleges that the deal’s market materials crossed the line for fraud. Considering how popular shorting subprime mortgages and synthetic CDOs became, it remains to be seen if Goldman is the only bank that the SEC is eyeing for fraudulent CDO disclosure. For additional information on the case of SEC v. Goldman, Sachs & Co. and Fabrice Tourre and Paulson & Co.’s role, please see the previous Westlaw Business Currents article CDO Litigation: The SEC, Goldman, and its Courtroom Cousins.
Similarly, questions revolve around Goldman’s decision not to disclose the Wells Notice it received regarding ABACUS 2007 AC-1. A Wells Notice informs a company or individual that the SEC is considering civil charges. Public companies often disclose when they or one of their employees receives a Wells Notice, but Goldman didn’t disclose the notice it received on Abacus. For additional information Goldman’s Wells Notice and other banks disclosure of subprime related Wells Notice please see the previous Westlaw Business Currents article Hot Topic: Disclosing Wells Notices and Goldman.
As of this week, the SEC isn’t alone at taking aim at Goldman’s disclosure. The recently filed Richman v. Goldman Sachs Group Inc et al. is a shareholder class action suit led by named plaintiff class representative Ilene Richman, filed in the Southern District of New York. The complaint takes aim squarely at the bank’s decision to not disclose the ABACUS Wells Notice. The suit alleges that Goldman and co-defendants Lloyd C. Blankfein (Chairman and CEO), David A. Viniar (CFO), and Gary D. Cohn (President and COO) violated federal securities law by issuing materially false and misleading statements during the class period – between October 15, 2009 and the time it was publicly revealed on April 16, 2010 that the SEC had sued Goldman. The complaint asserts, among other things, that updates the bank made to its 10-Q and 10-K legal proceeding sections were false and materially misleading because they made no mention of the Wells Notice and ongoing investigation into ABACUS 2007-AC1. Robbins Geller Rudman & Dowd is representing the plaintiffs in the matter.
Ilene Richman is not the only irate shareholder. Rosinek v. Blankfein et al. is a shareholder derivative suit filed in New York State Supreme Court. The suit alleges breach of fiduciary duty against Goldman Sachs and names each member of the board of directors, including CEO and Chairman Lloyd Blankfein, as co-defendants. The complaint in this case alleges that the board breached its fiduciary duty by failing to institute adequate internal controls on the 23 ABACUS transactions, one of which is the focus of the SEC complaint. The suit claims:
As a direct and legal result of the Individual Defendants’ wrongful conduct, Goldman Sachs has been significantly and materially damaged, faces billions of dollars of liability, has incurred and will continue to incur millions of dollars of expense in defending the claims against the SEC and investors, and has suffered serious damage to its reputation and image.
The suit is seeking maintenance as a derivative action, compensatory damages, court costs, and any further compensation the court deems appropriate. Farqui & Farqui is representing the plaintiffs.
Spiegel v. Blankfein et al. is yet another shareholder derivative suit that has been filed in New York State Supreme Court. The complaint is a carbon copy of the complaint in Rosinek v. Blankfein et al. Farqui & Farqui and Gardy & Notis are representing the plaintiffs.
It remains to be seen if the SEC or shareholders will have any luck cowing a defiant Goldman Sachs in court. The shareholder actions, however, are aiming much higher in the corporate food chain than the SEC’s target, Vice President Fabrice Tourre. It seems shareholders think that disclosure problems swirling around ABACUS 2007-AC1 and the Wells Notice reside in the boardroom and at C-suite level.

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