While most securities fraud lawsuits accuse the defendant of manipulating their stock prices to keep them artificially high, the current lawsuit against Goldman Sachs alleges the company lied to maintain its high stock prices, rather than lying to cause the prices to rise. It’s a unique allegation, and one the U.S. Supreme Court has not yet recognized, but two lower courts have already upheld it as a valid claim.
Goldman appealed the decision made by the district court and the Second U.S. Circuit Court of Appeals to the Supreme Court. The company alleges that, if the Supreme Court were to allow the securities lawsuit against it to proceed, the result would be devastating for public companies all over the country.
Goldman is arguing that the allegations against it are too weak to be valid. The allegations made by the shareholders rely on Goldman’s advertising claims that included words like “honesty” and “integrity” and claimed the company always prioritized the interests of its clients, when the opposite turned out to be true.
According to Goldman, the statements cited by the lawsuit are too vague to make the basis of a securities-fraud case. The company has also denied the statements had any effect on its stock price. If the lawsuit is allowed to proceed through the courts, the bank alleges it will allow shareholders to file securities-fraud lawsuits in the future simply by pointing to any kind of aspirational statement that nearly all companies make in their marketing materials.
The Society for Corporate Governance wrote a friend-of-the-court brief, in which it supported Goldman’s claims as they relate to the decision made by the Second Circuit Court of Appeals. According to the brief, the appellate court’s decision could prevent companies from making statements about trying to improve their diversity or reduce harassment in the workplace if they’re afraid their failure to live up to such statements could result in a lawsuit.
According to the allegations, Goldman made these statements while also advertising “Abacus”, a type of investment known as a synthetic collateralized debt obligation (CDO). According to the lawsuit, the bank allegedly marketed Abacus and other CDOs to its clients without revealing that John Paulson, the hedge fund manager, played a role in selecting these CDOs for Goldman’s shareholders while his own hedge fund, Paulson & Co., was betting Abacus would fail.
When Abacus did fail, Paulson made $1 billion while Goldman’s clients lost a similar amount. The bank then faced fraud charges by the Securities and Exchange Commission (SEC), which resulted in the bank paying $550 million to settle the charges, although Goldman refused to either admit or deny the charges.
The investigation by the SEC caused Goldman’s stock to tumble, which the lawsuit alleges caused the bank’s shareholders to lose approximately $13 billion. The named plaintiffs filing the lawsuit include the Arkansas Teacher Retirement System, as well as a pension fund for plumbers.
The shareholders are seeking to file a class action securities-fraud lawsuit against Goldman that would represent everyone who purchased Goldman stock from February 2007 to June 2010.
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