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SCOTUS Ruling On Goldman Sachs Securities Fraud Case Could Decimate Investor Rights And Protections

With Oral Arguments Less than 2 Weeks Away, Stark Implications Seen for Investors in Outcome of Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System. I urge all to share this post and give this case the attention it deserves.

Will the U.S. Supreme Court allow investors defrauded by Goldman Sachs during the financial crisis to have their day in court? Or, will the Court rule in favor of Goldman Sachs and, in so doing, create a roadmap that publicly traded companies can use to make false and misleading statements that will harm Main Street investors and dramatically undermine market confidence by making it impossible for any investor to rely on the public statements of companies?

In a news conference today, leading pension, consumer, and legal experts warned that these are the stakes when the U.S. Supreme Court hears oral arguments on March 29th in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System.

If the court allows Goldman Sachs to evade accountability to investors who lost money after the Wall Street giant made what later proved to be false statements, the experts see devastating consequences ahead for both investors and the markets.  The concern in brief: Such an “anything goes” loophole would be taken up by other publicly traded companies and result in the fleecing of unwary investors and a pull back from the markets by more sophisticated individuals and institutions unable to rely on any company’s public statements.

Barbara Roper, director of investor protection, Consumer Federation of America, said: “To protect its sterling image, and its share price, Goldman made false statements that it always acted in its clients’ best interest and carefully managed its conflicts, even as it was selling mortgage-backed securities to its clients without warning them that the investments were destined to fail. Those facts are well established in enforcement actions by both the Securities and Exchange Commission and the Department of Justice. Despite that fact, Goldman is asking the Supreme Court to conclude that its disclosures, which led directly to investor losses, were too generic to permit those investors to recover their losses in court. But such a maneuver, if allowed to go unchallenged by the Court, would let companies off the leash, ushering in a wide range of misleading behavior that could materially harm U.S. investors.”

Kevin Lindahl, general counsel and deputy executive director, Fire and Police Pension Association of Colorado, said: “Our job is to make sure that police, fire and other public employees in Colorado have a properly funded retirement. To do that, we have to be able to make investment decisions that are based on factual statements by public companies. If we cannot rely on those statements and if we are barred from seeking redress when false and misleading statements are made by such companies, our job is made immeasurably more difficult and the risk to our retirees goes up sharply.”

Lynn Turner, former chief accountant, U.S. Securities and Exchange Commission, said: “From the inception of the federal securities laws, Congress recognized that securities markets incorporate publicly available information into their pricing. Congressional regulation thus targets the manipulation of securities prices through false or misleading statements and omissions. Recent history illustrates the wisdom of these principles and the dramatic and destructive impact that false or misleading statements or omissions can have on markets and investor confidence.”

Matthew Cain, Ph.D., former financial economist, U.S. Securities and Exchange Commission, and senior fellow, Berkeley Law School, said: “The allegations in this case involving Goldman Sachs are quite serious. In fact, in a related case Goldman paid the largest penalty in SEC history at that time – over $500 million. Some people have argued that allowing cases like this to proceed will open the floodgates to frivolous litigation. I find it ironic that anyone could equate conduct that resulted in the largest SEC penalty ever with frivolous litigation. The truth is that shareholder lawsuits are a vital component of investor protection and it is imperative that the Supreme Court not take any actions that would handicap this important check on corporate wrongdoing.”

Andrew Park, senior policy analyst, Americans for Financial Reform Education Fund, said: “There remains overwhelming evidence, courtesy of the 2011 Senate Permanent Subcommittee on Investigations report, showing how Goldman’s employees were not only aware of the poor quality of mortgage-backed securities and collateralized debt obligations  they were selling, but also that they knowingly failed to disclose to their clients key details on how the bank or hedge funds were on the other side betting against them. If shareholders faced with losses have no recourse against companies who concealed their behavior and knowingly skirted a number of laws, a terrible precedent will be set for investor protection going forward.”

On March 3rd,  six former U.S. Securities and Exchange Commission commissioners – including SEC Chairs William H. Donaldson and Arthur Levitt, Jr. – were among those cautioning the Supreme Court about the peril of allowing Goldman Sachs to avoid facing an investor lawsuit related to false and misleading claims that the investment world giant admits that it made.  Amicus briefs in opposition to Goldman Sachs also were filed by state securities regulators, investor advocates, pension funds, and others.

BACKGROUND

On December 11, 2020, the Supreme Court agreed to hear Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System.  Originally filed in 2010, the case was brought by investors who bought stock in Goldman Sachs in the early days of the global financial crisis at a price that was inflated by Goldman’s false statements about its high standard of conduct and strong protections against conflicts of interest. At the time, Goldman Sachs was widely respected as “the gold standard on Wall Street.”

Unbeknownst to its customers or investors, however, Goldman’s business practices fell well short of the lofty image it worked to perpetuate. Goldman was reaping rich rewards from the creation and sale of a complex type of mortgage-backed security, referred to as a “collateralized debt obligation” (CDO), backed by mortgages it knew were likely to fail. Goldman executives knew the investments were problematic and likely to fail, as evidenced by internal emails.

In one particularly egregious case that was the subject of a SEC enforcement action, Goldman worked with one favored hedge fund customer, who was planning to short (or bet against) a particular CDO, to maximize its chances of failure. Goldman then turned around and sold that CDO to other unsuspecting customers without warning them it had been designed to fail.

During that time, when Goldman was profiting richly by playing one set of customers off against another, it continued to issue solemn public assurances that it had “extensive procedures and controls that are designed to identify and address conflicts of interest” and that “[o]ur clients’ interests always come first.” When the extent of its duplicity became known, however, it suddenly became the symbol of all that was wrong with Wall Street, lampooned in Rolling Stone Magazine as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” When its stock price dropped, investors who had trusted its false claims suffered financial harm. At stake in this case is their ability to recover their losses.

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