Goldman Had 9 Months' Warning From SEC--Report
Goldman Sachs responded to the so-called Wells notice from the SEC within months and met with agency officials in an effort to fend off the civil lawsuit, Bloomberg reported, citing its sources, who declined to be identified because the discussions weren't public.
The SEC sent Goldman the Wells notice in July 2009, and the company responded in September. In March 2010, the New York-based firm said in a regulatory filing that it was cooperating with regulators' "requests for information," Bloomberg noted.
On Friday, the SEC charged Goldman with securities fraud, alleging that the bank didn't tell investors in a collateralized debt obligation that hedge-fund firm Paulson & Co. had helped structure the deal and was betting against it. Goldman shares slumped 13% after the suit, the stock's biggest one-day loss in more than a year, knocking more than $10 billion off the company's market value.
Companies typically disclose legal issues such as regulatory probes in their quarterly and annual financial reports. If companies get Wells notices from the SEC, they often specifically disclose this, too. However, Goldman wasn't required to disclose the Wells notice if it believed it wasn't a material event. The notices don't always lead to charges or fines, a report in The Wall Street Journal noted.
"The question is whether a general disclaimer like that is rendered misleading because you left out the specifics," Adam Pritchard, a former SEC attorney, told Bloomberg News. "The prudent, conservative choice is to disclose more," because omissions can lead to shareholder lawsuits, Pritchard added.
Goldman's annual report for 2009, filed with the SEC in March, recycled a passage the company had used in the previous year's report to describe regulatory probes involving securities linked to subprime mortgages, Bloomberg reported. In both cases, the firm stated the following:
"GS&Co. and certain of its affiliates, together with other financial services firms, have received requests for information from various governmental agencies and self-regulatory organizations relating to subprime mortgages, and securitizations, collateralized debt obligations and synthetic products related to subprime mortgages. GS&Co. and its affiliates are cooperating with the requests."
Lucas van Praag, a spokesman for Goldman Sachs in New York, declined to comment to Bloomberg.
On Friday, Goldman had said the SEC's charges were "completely unfounded in law and fact," and the investment bank promised to "vigorously contest them and defend the firm and its reputation."
But Goldman may now face a raft of private lawsuits that could try to piggybank on the SEC's case, The Journal reported.
Paul Geller of Robbins Geller Rudman & Dowd, which represents a union that's suing Goldman over mortgage-securities losses, told the Journal that private lawyers are "foaming at the mouth."
Investors who were hurt by the alleged fraud are likely to sue. ABN Amro, now owned by the Royal Bank of Scotland (RBS), and German lender IKB lost roughly $1 billion after investing in the Goldman CDO at the center of the SEC's suit.
These banks may have a fiduciary duty to their private or public shareholders to sue, James Kramer, a lawyer at Orrick who defends companies against securities claims, told the Journal.
"IKB and other disappointed Abacus investors will almost certainly pursue related CDO claims against Goldman," Brad Hintz, a Wall Street analyst at Bernstein Research, wrote in a Friday note to investors.
Hintz estimated that Goldman could face a liability of $706.5 million from the SEC's suit, in a worst-case scenario. This includes the cost of claims by ABN Amro and other investors in the CDO, known as Abacus 2007-ACI. It also includes $70 million in fee disgorgement and fines by the SEC.
If Goldman doesn't settle with the SEC, the regulator could take depositions of Goldman employees, among other things, and disclose it publicly in court, potentially helping lawsuits filed by alleged victims, Kramer explained to the Journal.
Direct or so-called derivative lawsuits from Goldman shareholders could also follow. That's because Goldman shares slumped 13% after the SEC suit was announced Friday.
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 told the Journal. Direct claims by shareholders that the company or officers made material omissions or misstatements to them would be more difficult to prove, he added.
-By Alistair Barr; 415-439-6400; AskNewswires@dowjones.com
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