Goldman Sachs now hit with 6 shareholder suits
Tuesday, May 4, 2010
Goldman Sachs said Monday that six private lawsuits alleging "breach of fiduciary duty, corporate waste, abuse of control, mismanagement and unjust enrichment" have been filed against the bank since the government charged it last month with committing fraud.
The rare announcement, in the form of a regulatory filing, underscores the widening legal assault that Goldman is facing as well as the firm's increasing sensitivity about telling investors any information that might be deemed pertinent.
The issue of disclosure is at the center of the Securities and Exchange Commission's civil fraud suit against the company. The SEC alleges that Goldman failed to tell clients looking to invest in the housing market important details about an investment opportunity the bank was touting, known as collateralized debt obligation. Goldman denies wrongdoing.
The private suits might not be the end of Goldman's legal challenges. Goldman said in its filing Monday that it expects more "regulatory and other investigations and actions commenced, with respect to offerings of collateralized debt obligations."
In addition, law enforcement sources said last week that the Justice Department is conducting a criminal investigation of Goldman's mortgage business. The sources, who spoke on the condition of anonymity, described the probe as preliminary.
The private lawsuits, filed by a range of investors including individual shareholders and a pension fund for an electrical workers union, piggyback on the claims made by the SEC in its case. The shareholders argue that the firm's allegedly fraudulent behavior led to losses for its investors.
The lawsuits were filed in federal court and are publicly available. Goldman's decision to publish a summary of the suits highlights how the firm now wants to be transparent and tell investors any information they might consider to be relevant.
Some securities lawyers say that Goldman might have failed to meet that threshold when it didn't tell investors last summer that it had received notice from the SEC that the bank would likely face legal action in connection with the CDO business.
Companies are only required to tell investors about a potential SEC suit if it is likely to have what is known as a "material" impact -- financial losses a firm might incur as a result of a sanction or injuries to its reputation.
In other words, a company is supposed to tell shareholders about any information that might lead them to alter investment decisions.
Some of the lawsuits against Goldman point out that in the days since the SEC unveiled the case against the bank in mid-April, the firm's shares have lost a fifth of their value. The declines erased $20.6 billion in Goldman's market value.
The firm's shares recovered a bit Monday. Goldman's stock rose $4.30, or nearly 3 percent, closing at $149.50.
The private lawsuits seek compensation from Goldman, action against its top executives and generic changes to how the firm runs its business to prevent the alleged conduct from recurring.
Whatever the legal outcome of the private or government lawsuits, the legal affront is likely to cost Goldman. Some estimate that Goldman's legal fees could reach $100 million.
It could cost the firm in other ways, too, if clients question whether Goldman is putting their interest after the firm's and shareholders wonder whether the storied investment bank remains a good place to invest their money.
Anticipating that Goldman might fare badly in coming months, several financial analysts downgraded the firm's stock last week, citing the SEC's charges.
The SEC and private actions will run on separate tracks. Private actions are unlikely to have an effect on the SEC litigation, but the SEC case could provide a modest boost to private litigants. Shareholders who file suits against public companies must provide evidence of wrongdoing for their claims to be heard. The SEC's charges might provide the evidence they need.
But the effects could be limited. The SEC is alleging that the bank defrauded clients -- not its shareholders. The onus, therefore, would be on the shareholders to prove that they were harmed by Goldman's conduct. That could be difficult since the conduct, in general, helped Goldman profit from the financial crisis, avoiding the severe losses that affected so many of its rivals.