Financial Regulatory Forum

SEC’s boardroom bombshell: directors can be costly

NEW YORK, March 4 (Westlaw Business) Being an insider with a fiduciary duty sure is risky, as heavyweight Rajat Gupta is now finding out amidst serious SEC charges. So is having board members, as Goldman Sachs and Procter and Gamble are now worrying. Of great concern to each are the reputational risks and attendant costs that this might impose on them. The potential risks could relate to a broad range of issues, ranging from inside information, to disclosure of SEC investigation and board member protection. Though this likelihood may seem remote, recent experiences from Bank of America to Goldman Sachs itself show them to be painfully possible.

With a plot literally ripped from the headlines and a narrative crackling like a Law & Order script, the Commission has charged Gupta in the spreading Galleon insider trading scandal. The case links Berkshire Hathaway, Goldman Sachs and Procter and Gamble (P&G) to what is shaping up to be one of the biggest non-Madoff financial crime stories of the young century. (more…)

ANALYSIS-Goldman silence on probe a model others will avoid?

Reuters Staff

Jun 7, 2010 16:28 EDT

By Matthew Goldstein and Steve Eder

NEW YORK, June 4 (Reuters) – The decision of Goldman Sachs Group Inc not to tell shareholders that U.S. regulators might sue the bank over a subprime mortgage-linked security could cause other companies to rethink the way they handle regulatory investigations.

The investment banking powerhouse has said its lawyers found no reason to disclose a Wells notice from the Securities and Exchange Commission because the transaction at issue was relatively small and the case had little legal weight.

But another calculus may have been at work, too: the potential negative impact that disclosing the Wells notice would have had on the firm’s share price last fall.

A report last summer by Cornerstone Research, a securities litigation consulting shop, found that shares of companies that reported getting a Wells notice from the SEC incurred a “statistically significant market-adjusted” price decline.

A Wells notice is a letter indicating the likelihood of regulatory action and giving the people or company targeted a chance to respond.

The Cornerstone report, prepared at the request of the American Bar Association, found that on average, shares of companies dropped 2.6 percent after they reported the receipt of a Wells notice.