It the filing of its 10-Q, The Goldman Sachs Group (NYSE:GS) said its was cooperating with federal authorities on charges that include SEC allegations of fraud and possible criminal charges from the Justice Department.
The financial firm also said that its board has received a number of letters about shareholder actions against Goldman and it management. Some of these letters also indicated that the board should make changes at the top of the investment bank. The notes make force the Goldman board to begin it own internal review by hiring its own counsel as part of its fiduciary obligations.
One of the most disturbing revelations in the filing is the extent to which shareholders have begun to sue the firm and the belief that those legal actions could mushroom.
The filing also indicates that Goldman Sachs may have the “Salomon Brothers” problem which is that the government could prevent it from performing certain activities critical to the company’s revenue and profits. Goldman could be banned from being a broker-dealer and from commodities trading and investment banking. Actions along these lines could cripple the company be making it impossible for it to performing market transactions that are critical to it survival.
The disclosures show just how much leverage the government has with Goldman and paints a grim picture of the worst case scenario for the firm
Douglas A McIntyre
Entire section of the 10-Q:
On April 16, 2010, the SEC brought an action (SEC Action) under the U.S. federal securities laws in the U.S. District Court for the Southern District of New York against GS&Co. and one of its employees in connection with a CDO offering made in early 2007 (2007 CDO Transaction), alleging that the defendants made materially false and misleading statements to investors and seeking, among other things, unspecified monetary penalties. Notices of investigation subsequently have been received by GS&Co. from FINRA and by GSI from the U.K. Financial Services Authority, and Group Inc. and certain of its affiliates have received requests for information from other regulators regarding CDO offerings, including the 2007 CDO Transaction, and related matters.
Since April 22, 2010, a number of putative shareholder derivative actions have been filed in New York Supreme Court, New York County, and the United States District Court for the Southern District of New York against Group Inc., the Board and certain officers and employees of Group Inc. and its affiliates in connection with CDO offerings made between 2004 and 2007, including the 2007 CDO Transaction. These derivative complaints generally include allegations of breach of fiduciary duty, corporate waste, abuse of control, mismanagement, unjust enrichment, misappropriation of information and insider trading, and challenge the accuracy and adequacy of Group Inc.’s disclosure. These derivative complaints seek, among other things, declaratory relief, unspecified compensatory damages, restitution and certain corporate governance reforms. In addition, plaintiffs in the Delaware Court of Chancery actions described in the “Compensation-Related Litigation” section above have amended their complaint to assert, among other things, allegations similar to those in the derivative claims referred to above.
Since April 23, 2010, the Board has received letters from shareholders demanding that the Board take action to address alleged misconduct by GS&Co., the Board and certain officers and employees of Group Inc. and its affiliates. The demands generally allege misconduct in connection with the 2007 CDO Transaction, the alleged failure by Group Inc. to adequately disclose the SEC investigation that led to the SEC Action, and Group Inc.’s 2009 compensation practices. The demands include a letter from a Group Inc. shareholder, which previously made a demand that the Board investigate and take action in connection with auction products matters, and has now expanded its demand to address the foregoing matters.
In addition, beginning April 26, 2010, a number of purported securities law class actions have been filed in the United States District Court for the Southern District of New York challenging the adequacy of Group Inc.’s public disclosure of, among other things, the firm’s activities in the CDO market and the SEC investigation that led to the SEC Action. The purported class action complaints, which name as defendants Group Inc. and certain officers and employees of Group Inc. and its affiliates, generally allege violations of Sections 10(b) and 20(a) of the Exchange Act and seek unspecified damages.
We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions commenced, against us with respect to offerings of CDOs.
To the extent we are unable to obtain appropriate waivers from relevant regulators, resolution of the SEC Action, through a judgment or a settlement that includes an injunction, a cease-and-desist order or a finding of fraud, could result in collateral consequences to us that may materially adversely affect the manner in which we conduct our businesses, including, without limitation, an inability to act as a registered broker-dealer or provide certain advisory and other services to U.S. registered mutual funds. In addition, regulators could impose restrictions on the activities of our banking, commodities, investment advisory or other regulated businesses