A Blog by Jonathan Low


Mar 31, 2021

Reputational Return: Supreme Court Weighs Goldman Sachs' Ethics Claim Value

Written statements claiming 'our clients' interests always come first' appear questionable in light of some clients losing more than $1 billion in a scheme Goldman knew was designed to bilk them. 

The legal issue is to what degree Goldman is liable for misleading those clients, which include pension funds. JL

Jess Bravin reports in the Wall Street Journal:

The Supreme Court examined whether Goldman Sachs' assertions of ethics and integrity, undermined in the 2008 financial crisis, could expose it to a shareholder class action over false statements. Between 2006 and 2010, Goldman assured investors about its measures to ensure integrity. (But) Goldman allowed the hedge fund Paulson & Co. to bundle mortgages into bonds that Goldman sold to investors while knowing Paulson was betting the investments would fail. The plan netted $1 billion at investors’ expense. “Our reputation is one of our most important assets. Our clients' interests always come first."

The Supreme Court on Monday examined whether Goldman Sachs GS -1.55% Group Inc.’s generic assertions of corporate ethics and integrity, undermined when the company’s role in the 2008 financial crisis was revealed, could expose it to a shareholder class action over false statements.

The case is the latest in a series in which the court has calibrated the standards and burdens of proof between plaintiff shareholders and defendant corporations in big-dollar class actions. But the tenor of Monday’s argument suggested that the court was leaning toward a minor clarification rather than a major revision of class-action procedures.

Between 2006 and 2010, Goldman assured investors with statements about its measures to ensure integrity.

“Our reputation is one of our most important assets. As we have expanded the scope of our business and our client base, we increasingly have to address potential conflicts of interest, including situations where our services to a particular client or our own proprietary investments or other interests conflict, or are perceived to conflict, with the interest of another client,” the company said. “We have extensive procedures and controls that are designed to identify and address conflicts of interest.”

The bank also wrote: “Our clients’ interests always come first.”

In that time period, Goldman’s Abacus investment program allegedly allowed the hedge fund Paulson & Co. to help bundle mortgages into bonds that Goldman sold to investors while knowing that Paulson was betting that the investments would fail. The plan, which netted some $1 billion for Paulson at investors’ expense, led Goldman to pay $550 million in a 2010 settlement with the Securities and Exchange Commission in which it acknowledged providing “incomplete information” in marketing materials.

Investors in Goldman, led by the Arkansas Teacher Retirement System, sued the Wall Street firm in 2011, alleging that it had propped up its stock price by falsely asserting its safeguards would prevent conflicts of interest while the firm was actually working against its clients. The case has traveled up and down the court system since, and at one point it appeared the justices might rule on whether general statements like Goldman’s assertion of ethical conduct could be actionable at all.

But by the time the case reached the Supreme Court on Monday, the parties’ differences had narrowed, with neither Goldman nor the Arkansas retirement system staking out a categorical position.

Justice Samuel Alito appeared frustrated that the claims had shrunk to such incremental size.

“You now disclaim in your brief the argument that a statement in itself can be so bland and innocuous and uninformative that there can’t be reliance,” he told Goldman’s lawyer, Kannon Shanmugam. “Do you really want to say that?”

“What we’re saying, Justice Alito, is that the more generic a statement is, the less likely it is to have price impact,” Mr. Shanmugam said.

Justice Elena Kagan asked the reciprocal question of Tom Goldstein, the lawyer representing the Arkansas retirement system. Say the trial judge is overwhelmed with reports and testimony by dueling experts in the case and says, “I’ve been getting bleary-eyed, and there seem to be ambiguities, there seem to be gaps, and I’m going to fill that in with my gut intuition of what really matters to investors in the real world,” Justice Kagan said. “Would that be appropriate?”

“I think that if there are competing expert reports, the judge is not required to turn himself or herself into a computer,” and can apply common sense to “assess those sorts of reports in the way that judges evaluate expert testimony overall,” Mr. Goldstein said.

“I just don’t think that what we should have is judges saying, ‘Look, I just know how economic markets work’” and ignore what the parties’ expert evidence shows, he added.

With so little dispute between the parties, Justice Stephen Breyer wondered why the court was hearing the case at all.

Both sides agreed that when it came to the impact of general corporate statements on share prices, “the fact that it’s general doesn’t mean never. The fact that it’s general means sometimes it can affect the price,” he said, and determining whether that’s so depends on the evidence presented.

“Apparently, everybody agrees: Take the evidence for what it’s worth. Fine,” Justice Breyer said. “Why isn’t that the end of the case?”

A decision in the case, Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, is expected before July.


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