Banking & Finance

Goldman Sachs Defies Calls Against Compensation (GS)

Goldman Sachs Group, Inc. (NYSE: GS) is going to get hear more criticism over the notion that it creates so many millionaires.  Compensation has been an issue since about half way through the recession, particularly after it came to light about bonuses and record payments to employees.  This morning came Goldman’s 10-K, or its annual report, and as with most brokerage firms, investment banking firms, and financial institutions, the “Legal Proceedings” are lengthy.  Goldman Sachs seems to be extra-lengthy, but what is interesting is that the company is fighting shareholders pressing for changes to its compensation structure.

The company showed that back in 2007 it was sued over the compensation of certain employees. That complaint alleged “excessive awards” and that senior management received excessive compensation, constituting corporate waste. The complaint seeks an injunction against the 2007 shareholder annual meeting.  Goldman got out of that one: On July 20, 2007, defendants moved to dismiss the complaint, and the motion was granted by an order dated December 18, 2008. Plaintiff appealed on January 13, 2009, and the dismissal was affirmed by the U.S. Court of Appeals for the Second Circuit on December 14, 2009.

The company then showed that on January 17, 2008, it was sued in a related purported shareholder derivative action brought by the same plaintiff covering the same issues for 2008…  On March 24, 2009, the same plaintiff filed a suit against Goldman Sachs alleging violation of Delaware statutory and common law in connection with substantively similar allegations regarding stock option awards. On April 14, 2009, Group Inc. removed the action to the U.S. District Court for the Southern District of New York and has moved to transfer to the district court judge presiding over the other actions described in this section and to dismiss. The action has been transferred on consent to the U.S. District Court for the Eastern District of New York, where defendants moved to dismiss on April 23, 2009. On July 10, 2009, plaintiff moved to remand the action to state court.

Goldman Sachs went on to note that purported shareholder derivative actions have been commenced in New York Supreme Court, New York County and Delaware Court of Chancery beginning on December 14, 2009, alleging that its board of directors breached its fiduciary duties in connection with setting compensation levels for the year 2009 and that such levels are excessive. The complaints seek, inter alia, damages, restitution of certain compensation paid, and an order requiring the firm to adopt corporate reforms.

It is without surprise that Goldman Sachs noted this part… It has received inquiries from various governmental agencies and self-regulatory organizations regarding the firm’s compensation processes. On this it noted, “The firm is cooperating with the requests.”

More importantly, Goldman Sachs specified that its board has received several demand letters from shareholders relating to compensation matters, including demands that Group Inc.’s board of directors investigates compensation awards over recent years, take steps to recoup alleged excessive compensation, and adopt certain reforms. Goldman is not going to change.  It noted, “After considering the demand letters, Group Inc.’s board of directors rejected the demands.”

As far as other issues in the Legal Proceedings, they are numerous and look like a resume building situation for every single blow-up or scandal out there.  Enron, Fannie Mae, Indymac, Refco, WaMu, IPO processes, World Online, ‘research independence’ matters, Montana Power, specialist operations, Treasury and SEC, short selling litigation, mortgages, private equity acquisition litigation, auction rate securities, credit derivatives and more.

The legal department must get triple  overtime.

Jon C. Ogg