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The Supreme Court will hear arguments from Goldman Sachs in a longstanding case that could have a material impact on shareholders wishing to bring securities fraud lawsuits.
The arguments are slated to begin Monday at 10 a.m. ET and be broadcast live as the court continues to meet remotely as a precaution against Covid-19.
The case, which dates back to the Great Recession, concerns statements made by the investment bank during the marketing of “Abacus,” an investment known as a synthetic secured bond.
Goldman promoted Abacus to its clients without disclosing that hedge fund manager John Paulson played a role in the selection of its subprime mortgage portfolio. Paulson’s hedge fund Paulson & Co. had placed huge bets on Abacus’ failure.
After Abacus collapsed in the housing crisis, Paulson made $ 1 billion and Goldman’s clients lost roughly the same amount. Goldman ultimately paid $ 550 million to clear the 2010 Securities and Exchange Commission fraud fees – the largest penalty a Wall Street bank has ever faced. In the settlement, the bank did not admit or deny the allegations.
The shareholders who filed the lawsuit, including the Arkansas Teacher Retirement System and a plumber and pipe fitter pension fund, said they lost up to $ 13 billion when Goldman’s shares fell following the SEC’s fraud investigation.
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Shareholders alleged that Goldman lied in claiming “Integrity and honesty are at the heart of our business” and “Our customers’ interests always come first” even when marketing Abacus and other CDOs it bets against would have.
Those statements, the shareholders said, were making Goldman stock artificially high.
Goldman has argued that the statements cited by shareholders are too vague and general to be the basis of a securities fraud case. The bank has also argued that the statements did not affect the share price.
While many securities fraud cases are based on false comments that cause the stock price to rise, Goldman shareholders instead argue that Goldman’s alleged manipulation was “inflationary maintenance” or prevented the stock from falling. The Supreme Court has never recognized such an argument, although some lower courts have recognized it.
The shareholders, who have been litigating since 2011, are attempting to classify the case on behalf of all Goldman stock buyers between February 2007 and June 2010.
A district court has ruled that shareholders can do so twice, and the US Court of Appeals approved that decision in April.
Goldman called on the Supreme Court to review the 2nd Circuit’s decision, saying it would be “devastating” for public corporations to abandon them. It has identified the case as the most important securities case to be heard in the Supreme Court since 2014, when judges ruled on a case with oilfield services giant Halliburton.
Goldman attorney Kannon Shanmugam, a partner in law firm Paul, Weiss, wrote in court records that a loss to the bank would mean shareholders filing future securities fraud lawsuits would be able to quote “Boilerplate aspirations, which almost all companies do. “
In a letter from a court friend, the Society for Corporate Governance wrote that the 2nd Circuit statement could have a dissuasive effect on companies seeking to make statements promoting diversity or countering harassment in the workplace.
The decision gives “a financial incentive to companies to remain silent on important social issues for fear that even general or ambitious statements will become the basis of allegations of crippling liability for securities fraud,” wrote Jeremy Marwell, group attorney and a partner at the Vinson & Elkins company.
On the other hand, financial transparency groups have argued that Goldman should be held accountable.
Stephen Hall, legal director at Better Markets, who filed a brief in support of shareholders, said Goldman’s argument was “strained”.
“As we explain in the letter, the bank’s top executives knew well before the ABACUS deal that they were increasingly doing business that created strong conflicts of interest, and they also knew they needed to better manage those conflicts,” said Hall in a statement.
“Such good intentions, however, along with honest statements, were completely abandoned when the bank aggressively attempted in 2007 to capitalize on the downward mortgage market at the expense of investors and ultimately shareholders,” he added.
Barbara Roper, director of investor protection for the Consumer Federation of America, said a win for Goldman would “unleash companies and introduce a wide range of misleading behaviors that could seriously harm US investors.”
The Justice Department filed a brief under President Joe Biden in February saying it did not support any party.
In the letter, the DOJ asked the judges to reverse the opinion of the 2nd Circuit and order the appeals court to re-examine the case, while giving greater consideration to Goldman’s argument that his statements were too general to affect the stock price.
Shanmugam will represent Goldman in Monday’s arguments. Shareholders will be represented by Tom Goldstein, a seasoned Supreme Court attorney known for publishing SCOTUSBlog. Sopan Joshi, a Justice Department attorney, will represent the United States.
A decision in this case is expected by the summer.
The case is Goldman Sachs Group v Arkansas Teacher Retirement System, No. 20-222.