Legal News

Plaintiffs? Attorneys ?Foaming at the Mouth? Over Goldman

By Amir Efrati

Suffice it to say, this wasn’t a good week for Goldman Sachs (examples here and here) — other than that by now most of its employees are kickin’ it in a sleek new Manhattan office.

By now, you’ve probably heard about the Securities and Exchange Commission’s allegations that Goldman sold a financial product tied to mortgages but withheld key information about it from investors, leading to $1 billion in investor losses.

In a statement issued Friday, Goldman vigorously denied the charges.

But now the firm may have something else to look forward to: private lawsuits that piggyback on the case.

"I think private lawyers are foaming at the mouth," said Paul Geller of Robbins Geller Rudman & Dowd, which represents a union that is currently suing Goldman over mortgage-securities losses.

Below is what the firm could face.

Lawsuits by Alleged Victim-Investors

For starters, plaintiffs' and defense attorneys agree that investors who were hurt by the alleged fraud are likely to sue.

As of now, it’s unclear whether the two investor-victims mentioned by the SEC in its case – Dutch bank ABN AMRO, now owned by the Royal Bank of Scotland, and a German bank called IKB – will file suit.

But those banks may have a fiduciary duty to their private or public shareholders to sue, said James Kramer, a lawyer at Orrick who defends companies against securities claims.

The SEC's case "is a roadmap" for those alleged victims, he said.

One of several things could happen, he said. Goldman could settle with the SEC, and the alleged victims would have to do the heavy lifting to win their cases.

If Goldman doesn't settle, the SEC could take depositions of Goldman employees, among other things, and disclose it publicly in court, potentially helping the lawsuits filed by alleged victims. If Goldman takes the case to trial and loses, Kramer said, it likely would choose to settle with the alleged victims rather than continue litigating.

Direct or Derivative Claims By GS Shareholders

Goldman's shares dropped 13% on Friday after the SEC suit was filed, wiping out $12 billion in market capitalization. Thus, Kramer said, direct or so-called derivative lawsuits by shareholders are inevitable.

In derivative suits, which would be easier to bring than direct claims, Goldman shareholders — acting on behalf of the company — would sue Goldman's board of directors for allegedly exposing the company to financial and reputational damage, Kramer said. Direct claims by shareholders that the company or officers made material omissions or misstatements to them would be more difficult to prove, Kramer said.

Bolstering Claims By Other Mortgage Securities Investors?

One area of debate is whether Friday's allegations will help ongoing cases against Goldman that allege, among other things, that Goldman sold subprime mortgage-related products to investors but was simultaneously engaged in deals in which it bet that the value of those same products would fall.

Darren Robbins, a lawyer at Robbins Geller, whose class-action against Goldman makes that allegation, said he’s troubled by the allegations that “Goldman is making representations to their clients, but on the other hand [is] engaged in a secret conspiracy.”

But Orrick's Kramer said it's not likely that the SEC's case will impact pending cases. At best, he said, the SEC case will cause "a judge to be less inclined to dismiss" such cases.

However, Goldman might argue that the alleged fraud was an isolated incident. If indeed it was isolated, Kramer said, "I don't think it opens a door on other claims that have been pending."

Full post as published by Law Blog - WSJ.com on April 17, 2010 (boomark / email).