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file | filename |
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8-K - FORM 8-K - GOLDMAN SACHS GROUP INC | y84170e8vk.htm |
EX-99.6 - EX-99.6 - GOLDMAN SACHS GROUP INC | y84170exv99w6.htm |
EX-99.7 - EX-99.7 - GOLDMAN SACHS GROUP INC | y84170exv99w7.htm |
EX-99.3 - EX-99.3 - GOLDMAN SACHS GROUP INC | y84170exv99w3.htm |
EX-99.2 - EX-99.2 - GOLDMAN SACHS GROUP INC | y84170exv99w2.htm |
EX-99.1 - EX-99.1 - GOLDMAN SACHS GROUP INC | y84170exv99w1.htm |
EX-99.5 - EX-99.5 - GOLDMAN SACHS GROUP INC | y84170exv99w5.htm |
Exhibit 99.4
JUDGE CASTEL ORIGINAL
10 CV 3505
10 CV 3505
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SOUTHERN DISTRICT OF NEW YORK
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MARGARET C. RICHARDSON,
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: | Civil Action No. | ||
derivatively on behalf of THE GOLDMAN
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SACHS GROUP, INC.
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Plaintiff,
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v.
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LLOYD C. BLANKFEIN, GARY D.
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COHN, JOHN H. BRYAN, CLAES
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DAHLBACK, STEPHEN FRIEDMAN,
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WILLIAM W. GEORGE, RAJAT K.
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GUPTA, JAMES A. JOHNSON, LOIS D.
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JULIBER, LAKSHMI N. MITTAL,
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JAMES J. SCHIRO, FABRICE TOURRE,
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: | JURY TRIAL DEMANDED | ||
DAVID A. VINIAR, JONATHAN EGOL,
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PABLO SALAME, RUTH J. SIMMONS,
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ESTA E. STECHER, J. MICHAEL
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EVANS, MICHAEL S. SHERWOOD, and
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SARAH E. SMITH,
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Defendants,
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and
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THE GOLDMAN SACHS GROUP, INC., |
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Nominal Defendant. |
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VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
1. Plaintiff Margaret C. Richardson (Plaintiff), by and through her undersigned attorneys,
hereby submits this Verified Shareholder Derivative Complaint (the Complaint) for the benefit of
nominal defendant The Goldman Sachs Group, Inc. (Goldman or the Company) against certain
current and/or former members of its Board of Directors (the Board) and executive officers
seeking to remedy defendants breaches of fiduciary duties and unjust enrichment from 2007 to the
present (the Relevant Period).
NATURE OF THE ACTION
2. This is a shareholder derivative action based on defendants breaches of fiduciary
duty and other misconduct in connection with a synthetic collateralized debt obligation (CDO)
defendants caused Goldman to structure and market to investors, which eventually led to the
prosecution of the Company by the U.S. Securities and Exchange Commission (the SEC).
3. This synthetic CDO, ABACUS 2007-AC1, was tied to the performance of subprime residential
mortgage-backed securities (RMBS) and was structured and marketed by defendants in early 2007,
when the U.S. housing market and related securities were beginning to show signs of distress.
Synthetic CDOs such as ABACUS 2007-AC1 contributed to the recent financial crisis by magnifying
losses associated with the downturn in the U.S. housing market.
4. Defendants marketing materials for ABACUS 2007-AC1 including the term sheet, flip book
and offering memorandum for the CDO all represented that the reference portfolio of RMBS
underlying the CDO was selected by ACA Management LLC (ACA), a third-party with experience
analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to
investors, a large hedge fund, Paulson & Co. Inc. (Paulson), with economic interests directly
adverse to investors in ABACUS 2007-AC1, played a significant role in the portfolio selection
process. In fact, Paulson was designing the portfolio to decrease in value, as it was planning on
shorting this synthetic CDO.
5. After participating in the selection of the reference portfolio, Paulson effectively
shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with
Goldman to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its
financial short interest, Paulson had an economic incentive to choose RMBS that it expected to
experience credit events in the near future. Defendants did not disclose Paulsons adverse
economic interests, or its role in the portfolio selection process in the term sheet, flip book,
offering memorandum or other marketing materials.
-2-
6. In sum, defendants arranged a transaction at Paulsons request in which Paulson
heavily influenced the selection of the portfolio to suit its economic interests, but failed to
disclose, as part of the description of the portfolio selection process contained in the marketing
materials used to promote the transaction, Paulsons role in the portfolio selection process or its
adverse economic interests.
7. The SEC has alleged that one Goldman employee, defendant Fabrice Tourre (Tourre), was
principally responsible for ABACUS 2007-AC1. It has been alleged that Tourre devised the
transaction, prepared the marketing materials, and communicated directly with investors. Defendant
Tourre knew of Paulsons undisclosed short interest and its role in the collateral selection
process. Defendant Tourre also misled ACA into believing that Paulson invested approximately $200
million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulsons
interests in the collateral section process were aligned with ACAs, when in reality Paulsons
interests were sharply conflicting.
8. The deal closed on April 26, 2007. Paulson paid Goldman approximately $15 million for
structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS
2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of
the portfolio had been downgraded. As a result, investors in ABACUS 2007-AC1 lost over $1 billion.
Meanwhile, Paulsons opposite CDS positions yielded a profit of approximately $1 billion for
Paulson.
9. Defendants, including the Board, knew that as a result of these events, in July 2009, the
Company received a Wells Notice1 from the SEC. Critically, defendants concealed the
1 | A Wells Notice is a letter that the SEC sends to firms (or individuals) when it is planning to bring an enforcement action against them. The Wells Notice indicates that the SEC staff has determined it may bring a civil action against a firm or person. |
-3-
existence of the Wells Notice and/or the SECs investigation from the public for eight months
indeed; defendants did not disclose that the SEC had served Goldman with a Wells Notice until
after the SEC ultimately filed a lawsuit against Goldman on April 16, 2010.
10. While defendants (but not the public) knew of the Wells Notice issued to Goldman, certain
of them, including Esta E. Stecher (Stecher), Goldmans co-General Counsel, and John H. Bryan
(Bryan), a Board member, took advantage of their possession of material, adverse, non-public
information and collectively sold approximately $65.4 million worth of Goldman shares between
October 2009 and February 2010. As the Wall Street Journal (the Journal) reported on April 24,
2010, this was the most active spate of insider selling [at Goldman] in three years.
11. As the Journal revealed in an article entitled Insiders Sold Shares As SEC Probed Firm:
Five senior executives of Goldman Sachs Group Inc., including the firms co-general
counsel, sold $65.4 million worth of stock after the firm received notice of possible
fraud charges, which later drove its stock down 13%.
Sales by three of the five Goldman insiders occurred at prices higher than the stocks
current level. The stock sales by co-general counsel Esta Stecher, vice chairmen
Michael Evans and Michael Sherwood, principal accounting officer Sarah Smith and board
member John Bryan occurred between October 2009 and February 2010. It was the most
active spate of insider selling in three years, according to InsiderScore.com in
Princeton, N.J., which tracks and analyzes purchases and sales of stocks by top
executives and directors.
Goldman received notice of the possible charges last July, but didnt publicly disclose
that fact, later explaining that it didnt consider such a notice material information
investors would have needed to value the stock. A week ago, on April 16, the Securities
and Exchange Commission filed civil-fraud charges against Goldman for failing to
disclose that a short seller, Paulson & Co., participated in selection of assets in a
pool tied to subprime mortgages.
The charges drove Goldman stock down from a closing price of $184.27 on April 15 to
$160.70 on April 16. The stock hasnt recovered any of the first-day loss. It closed
out the week at $157.40 in 4 p.m. trading on the New York Stock Exchange.
* * *
-4-
Messrs. Bryan and Sherwood and Ms. Stecher sold some or all of their shares after
exercising options to buy at lower prices that would have expired between November 2010
and November 2012.
Ms. Smith sold 16,129 shares on Oct. 16 for $3 million at $186.57 a share, according to
InsiderScore.com.
Mr. Sherwood sold shares between Nov. 13 and 24 for $31.9 million, or $174.65 a share,
InsiderScore.com said. Mr. Evans sold shares between Nov. 23 and 27 for $23.7
million, or $169.56 a share. Ms. Stecher sold shares on Feb. 8 and 26 for $5.8 million,
or $153.38 a share. And Mr. Bryant sold shares on Feb. 18 for $932,223, or $155.37 a
share.
Mr. Sherwood, co-chief executive of Goldman Sachs International in London and Mr.
Evans, chairman of Goldman Sachs Asia in Hong Kong, are on the Goldman management
committee with Ms. Stecher.
Ben Silverman, director of research at InsiderScore.com, said the insider
selling since October was the most aggressive at Goldman in three years, since late
2006 through early 2007.
12. On December 23, 2009 (four months after the SEC issued a Wells Notice to Goldman, which
defendants had not disclosed), The New York Times published an article entitled Banks Bundled Bad
Debt, Bet Against It and Won, which specifically outed defendants breaches of fiduciary duties
and bets against Goldmans clients, and particularly in connection with the ABACUS deals. The Times
article stated, in pertinent part:
Pension funds and insurance companies lost billions of dollars on securities that they
believed were solid investments, according to former Goldman employees with direct
knowledge of the deals who asked not to be identified because they have confidentiality
agreements with the firm.
Goldman was not the only firm that peddled these complex securities known as
synthetic collateralized debt obligations, or C.D.O.s and then made financial bets
against them, called selling short in Wall Street parlance. Others that created similar
securities and then bet they would fail, according to Wall Street traders, include
Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an
investment company whose parent firm was overseen by Lewis A. Sachs, who this year
became a special counselor to Treasury Secretary Timothy F. Geithner.
How these disastrously performing securities were devised is now the subject of scrutiny
by investigators in Congress, at the Securities and Exchange Commission and at the
Financial Industry Regulatory Authority, Wall Streets self-regulatory organization,
according to people briefed on the investigations.
Those involved with the inquiries declined to comment.
-5-
While the investigations are in the early phases, authorities appear to be looking at whether
securities laws or rules of fair dealing were violated by firms that created and sold these
mortgage-linked debt instruments and then bet against the clients who purchased them, people
briefed on the matter say.
One focus of the inquiry is whether the firms creating the securities purposely helped to select
especially risky mortgage-linked assets that would be most likely to crater, setting their clients
up to lose billions of dollars if the housing market imploded.
Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured
within months of being created.
Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.s,
saying that they typically employ many trading techniques to hedge investments and protect against
losses. They add that many prudent investors often do the same. Goldman used these securities
initially to offset any potential losses stemming from its positive bets on mortgage securities.
But Goldman and other firms eventually used the C.D.O. s to place unusually large negative bets
that were not mainly for hedging purposes, and investors and industry experts say that put the
firms at odds with their own clients interests.
The simultaneous selling of securities to customers and shorting them because they believed they
were going to default is the most cynical use of credit information that I have ever seen, said
Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. When you buy
protection against an event that you have a hand in causing, you are buying fire insurance on
someone elses house and then committing arson.
* * *
Goldman Saw It Coming
Before the financial crisis, many investors large American and European banks, pension funds,
insurance companies and even some hedge funds failed to recognize that overextended borrowers
would default on their mortgages, and they kept increasing their investments in mortgage-related
securities. As the mortgage market collapsed, they suffered steep losses.
A handful of investors and Wall Street traders, however, anticipated the crisis. In 2006, Wall
Street had introduced a new index, called the ABX, that became a way to invest in the direction of
mortgage securities. The index allowed traders to bet on or against pools of mortgages with
different risk characteristics, just as stock indexes enable traders to bet on whether the overall
stock market, or technology stocks or bank stocks, will go up or down.
Goldman, among others on Wall Street, has said since the collapse that it made big money by using
the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives
decided in December 2006 to change the firms overall stance on the mortgage market, from positive
to negative, though it did not disclose that publicly.
-6-
Even before then, however, pockets of the investment bank had also started using
C.D.O.s to place bets against mortgage securities, in some cases to hedge the firms
mortgage investments, as protection against a fall in housing prices and an increase in
defaults.
[Jonathan] Egol was a prime mover behind these securities. Beginning in 2004, with
housing prices soaring and the mortgage mania in full swing, Mr. Egol began creating
the deals known as Abacus. From 2004 to 2008, Goldman issued 25 Abacus deals, according
to Bloomberg, with a total value of $10.9 billion.
Abacus allowed investors to bet for or against the mortgage securities that were linked
to the deal. The CD.O.s didnt contain actual mortgages. Instead, they consisted of
credit-default swaps, a type of insurance that pays out when a borrower defaults. These
swaps made it much easier to place large bets on mortgage failures.
Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept
most of these wagers for his firm, said five former Goldman employees who spoke on the
condition of anonymity. On occasion, he allowed some hedge funds to take some of the
short trades.
Mr. Egol and Fabrice Tourre, a French trader at Goldman, were aggressive from the start
in trying to make the assets in Abacus deals look better than they
were, according to notes taken by a Wall Street investor during a phone call with Mr.
Tourre and another Goldman employee in May 2005.
On the call, the two traders noted that they were trying to persuade analysts at
Moodys Investors Service, a credit rating agency, to assign a higher rating to one
part of an Abacus C.D.O. but were having trouble, according to the investors notes,
which were provided by a colleague who asked for anonymity because he was not
authorized to release them. Goldman declined to discuss the selection of the assets in
the C.D.O.s, but a spokesman said investors could have rejected the C.D.O. if they did
not like the assets.
Goldmans bets against the performances of the Abacus C.D.O.s were not worth much in
2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market
collapsed. The trades gave Mr. Egol a higher profile at the bank, and he was among a
group promoted to managing director on Oct. 24, 2007.
Egol and Fabrice were way ahead of their time, said one of the former Goldman workers.
They saw the writing on the wall in this market as early as 2005. By creating the
Abacus C.D.O.s, they helped protect Goldman against losses that others would suffer.
13. In response to the New York Times December 23, 2009 article, defendants
caused the Company to issue a press release the next day (December 24, 2009) specifically denying
any wrongdoing by any Goldman personnel entitled Goldman Sachs Responds to The New York Times on
Synthetic Collateralized Debt Obligations. Notably, the Board conducted no internal
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investigation into the matters raised by the December 23, 2009 New York Times article (nor
caused such an internal investigation to take place) before or after issuing this blanket denial of
wrongdoing.
14. Perhaps worse still (particularly in light of the fact that the New York
Times had now revealed that multiple governmental and regulatory
investigations, including one by the SEC, had begun), in addition to
denying any misconduct at Goldman, the Board chose to continue to
conceal that the Company had received a Wells Notice months earlier, or that
the SEC was investigating misconduct at Goldman. Defendants press
release stated, in relevant part:
Many of the synthetic CDOs arranged were the result of demand from investing
clients seeking long exposure.
Synthetic CDOs were popular with many investors prior to the financial crisis because
they gave investors the ability to work with banks to design tailored securities which
met their particular criteria, whether it be ratings, leverage or other aspects of the
transaction.
The buyers of synthetic mortgage CDOs were large, sophisticated investors. These
investors had significant in-house research staff to analyze portfolios and structures
and to suggest modifications. They did not rely upon the issuing banks in making their
investment decisions.
15. Several months later, on or about April 7, 2010, in a letter to Goldman shareholders
published as part of the Companys Annual Report on Form 10-K, defendants Lloyd Blankfein
(Blankfein), Goldmans Chairman and Chief Executive Officer (CEO), and Gary D. Cohn (Cohn),
the Companys President and Chief Operating Officer (COO) again denied any wrongdoing.
Specifically, Blankfein and Cohn stated: Although Goldman Sachs held various positions in
residential mortgage-related products in 2007, our short positions were not a bet against our
clients.
16. This was a lie. As the New York Times would later report in an article entitled Goldman
Cited Serious Profits On Mortgages published on April 24, 2010, certain of the
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defendants (and other top Goldman insiders), including Blankfein, Cohn, and David A. Viniar
(Viniar), the Companys Chief Financial Officer (CFO), traded e-mail messages in 2007 saying,
among other things, that they would make some serious money betting against the housing markets.
These emails, as noted by the New York Times, contradict statements by Goldman that left the
impression that the firm lost money on mortgage-related investments.
17. A little over a week after defendants specifically denied that Goldman personnel had
placed bets against the Companys own clients, on April 16, 2010, the SEC filed a civil action
against Goldman and defendant Tourre in this Court captioned Securities and Exchange Commission v.
Goldman Sachs & Co. and Fabrice Tourre, Case No. l:10-cv-03229-BSJ (the SEC Action). The SEC
Action charged Goldman and Tourre with defrauding investors by misstating and omitting key facts
about the products described herein.
18. Later that day, in a hastily-assembled press release, Defendants (including the Board)
once again, as usual, flatly denied the SECs allegations or any allegations of wrongdoing at
Goldman. Specifically, Defendants defiantly claimed that [t]he SECs charges are completely
unfounded in law and fact and we will vigorously contest them and defend the firm and its
reputation. Further, Defendants arrogantly added that [they] are disappointed that the SEC would
bring this action.
19. Immediately following the filing of the SEC Action, the price of the Companys stock fell
13% from $184.27 per share to close at $160.70 per share on April 16, 2010. This represented a
one-day market capitalization loss of over $10 billion.
20. The news for Goldman and its stockholders has only continued to worsen in the wake of the
filing of the SEC Action as the financial press got a hold of the story and investigated further.
-9-
21. For instance, in a April 17, 2010 article entitled For Goldman, a Bets Stakes Keep
Growing, the New York Times reported that, according to former Goldman employees, [a]s the
housing market began to fracture in 2007, senior Goldman executives began overseeing the mortgage
department closely...[and] routinely visited the unit. Among them were David A. Viniar, the chief
financial officer; Gary D. Cohn, then the co-president; and Pablo Salome, a sales and trading
executive, these former employees said. Even Goldmans chief executive, Lloyd C. Blankfein, got
involved. The New York Times also noted in this article that [r]ecent public statements made by
Mr. Blankfein seem to conflict with the S.E.C. account.
22. The New York Times further confirmed the involvement of top Goldman insiders, including
defendant Blankfein, in an April 18, 2010 article entitled Senior Executives at Goldman Had a
Role In Mortgage Unit. This article specifically states that executives up to and including
Lloyd C. Blankfein, the chairman and chief executive, took an active role in overseeing the
mortgage unit as the tremors in the housing market began to reverberate through the nations
economy.
23. Notwithstanding these revelations, defendants (including the Board) have continued to
issue unequivocal denials of wrongdoing and have refused to conduct any type of internal
investigation. For instance, on April 19, 2010, defendants caused the Company to state that we
believe that the firms actions were entirely appropriate.
24. The Board has specifically come under fire (and rightfully so) for its failure to
investigate and properly inform itself in the face of such serious allegations. For instance, in
an April 19, 2010 article published by Bloomberg entitled Goldman Sachs Stock, Board Under
Pressure Amid Probe, James Post, a professor of corporate governance and ethics at Boston
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University, took the Board to task for its apparent inaction and failure to
investigate, and noted that defendants strong and swift public denials of
any wrongdoing have compromised the Boards ability to investigate or take
any meaningful action. Moreover, this article also indicated that the total
costs to Goldman in connection with the SEC Action could amount to $2 billion.
The Bloomberg article, in pertinent part, states:
Prime Minister Gordon Brown called yesterday for the U.K. Financial Services
Authority to start a probe, saying he was shocked at the moral bankruptcy indicated
in the Securities and Exchange Commission suit against Goldman Sachs. Germanys
financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for
Chancellor Angela Merkel said.
The escalating rhetoric adds urgency to efforts by Chairman and Chief Executive Officer
Lloyd Blankfein and the rest of his board to stem negative publicity. Although Goldman
Sachs vowed to fight the SEC case, calling it unfounded in law and fact, the stock
plunged 13 percent on April 16. The shares rose 1.6 percent to $163.32 at 4:50 p.m. in
New York Stock Exchange composite trading.
The lynch-mob mentality that is prevailing right now against Goldman is such that you
dont know where this thing could go, so I think the stock is going to be under
continuing pressure, said Michael Holland, who oversees more than $4 billion as
chairman of New York-based Holland & Co. The board actually has to pay attention not
only to the legal niceties of this thing but also to the franchise viability as well.
* * *
Steve Stelmach, an analyst at FBR Capital Markets in Arlington, Virginia, today
removed Goldman from his Top Picks list, citing the SEC suit. He still reiterated his
outperform rating because of the banks strong fundamentals.
The market appears to be overly discounting the potential earnings impact from the SEC
charges, he wrote in a note to clients today. The stocks drop implies the suit may
cost the bank $2 billion before tax, twice the $1 billion the SEC says investors lost
in the transaction, he wrote.
* * *
Goldman Sachss board of directors should conduct its own investigation to ensure
that it understands what senior management knew about the issues raised by the SECs
complaint, said James Post, a professor of corporate governance and ethics at the
Boston University School of Management.
How Long?
The board has got to be insisting on a much deeper level of internal investigation
that reports only to them, not to Blankfein, Post said. Theyve
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got to be asking the question how long can we continue going with Blankfein before
weve got to clean house and put a new group of people in there?
William W. George, a Harvard Business School professor who has served on Goldman
Sachss board since 2002, referred a request for an interview to the companys press
office. His Twitter account, which lauded JPMorgan Chase & Co. CEO Jamie Dimon for his
firms better-than-expected earnings on April 14, remained silent on the controversy
surrounding Goldman Sachs.
Boston Universitys Post said he wouldnt expect the board to take any immediate action
to change the firms management because it would seem to contradict the defiant
position the company took on April 16.
Im pretty sure that the board at Goldman is having a bad weekend, Post said
yesterday. They may be praying for some news out of the Vatican or a new volcano to
get them off the front pages.
25. Defendants (including the Board) have similarly faced strong criticism for their failure
to disclose the Companys receipt of a Wells Notice. For example, on April 19, 2010, Reuters
published an article entitled Goldman May Face Backlash For Staying Mum on Probe, which stated
that not only did defendants learn of the likelihood of charges against Goldman in July 2009 with
the issuance of a Wells Notice, but that Defendants blanket denials and silence since that time
may further hurt the Company. Defendants decision to conceal the Wells Notice issued to Goldman
has further been criticized by Charles Elson,2 in an April 19, 2010 New York Post article entitled
Goldman Bosses Hid Feds Probe. Specifically, Mr. Elson stated "[i]n an age of heightened
transparency...receipt of that [Wells] notice should have been disclosed.
26. In addition to the Companys problems within the U.S. as a result of these events, on
April 20, 2010, it was revealed that Britains Financial Services Authority has now launched its
own probe in the matter.
27. On April 24, 2010, the New York Times published its article Goldman Cited Serious
Profits On Mortgages which revealed the contradiction between defendants public
2 | Mr. Elson is the Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. |
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statements and their private communications. Specifically, the New York Times reported:
In late 2007, as the mortgage crisis gained momentum and many banks were suffering losses,
Goldman Sachs executives traded e-mail messages saying that they would make some serious
money betting against the housing markets.
The messages, released Saturday by the Senate Permanent Subcommittee on Investigations,
appear to contradict statements by Goldman that left the impression that the firm lost money
on mortgage-related investments.
In the messages, Lloyd C. Blankfein, the banks chief executive, acknowledged in November
2007 that the firm had lost money initially. But it later recovered by making negative bets,
known as short positions, to profit as housing prices plummeted. Of course we didnt dodge
the mortgage mess, he wrote. We lost money, then made more than we lost because of shorts
He added, Its not over, so who knows how it will turn out ultimately.
In another message, dated July 25, 2007, David A. Viniar, Goldmans chief financial officer,
reacted to figures that said the company had made a $51 million profit from bets that housing
securities would drop in value. Tells you what might be happening to people who dont have
the big short, he wrote to Gary D. Cohn, now Goldmans president.
* * *
Goldman on Saturday denied it made a significant profit on mortgage-related products in
2007 and 2008. It said the subcommittee had cherry-picked e-mail messages from the nearly
20 million pages of documents it provided. This sets up a showdown between the Senate
subcommittee and Goldman, which has aggressively defended itself since the Securities and
Exchange Commission filed a security fraud complaint against it nine days ago. On Tuesday,
seven current and former Goldman employees, including Mr. Blankfein, are expected to testify
at a Congressional hearing.
Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations,
said that the e-mail messages contrasted with Goldmans public statements about its trading
results. The 2009 Goldman Sachs annual report stated that the firm did not generate
enormous net revenues by betting against residential related products, Senator Levin said
in a statement Saturday. These e-mails show that, in fact, Goldman made a lot of money by
betting against the mortgage market.
The messages appear to connect some of the dots at a crucial moment of Goldman history. They
show that in 2007, as most other banks hemorrhaged money from plummeting mortgage holdings,
Goldman prospered.
At first, Goldman openly discussed its prescience in calling the housing downfall. In the
third quarter of 2007, the investment bank reported publicly that it had made big profits on
its negative bet on mortgages.
But by the end of 2007, the firm curtailed disclosures about its mortgage trading results.
Its chief financial officer told analysts that they should not expect Goldman to reveal
whether it was long or short on the housing market. By late
-13-
2008, Goldman was emphasizing its losses, rather than its profits, pointing regularly to
write-downs of $1.7 billion on mortgage assets in 2008 and not disclosing the amount it made on its
negative bets.
Goldman and other firms often take positions on both sides of an investment. Some are long, which
are bets that the investment will do well, and some are shorts, which are bets the investment will
do poorly.
Goldman has said it added shorts to balance its mortgage book, not to make a directional bet on a
market collapse. But the messages released by the subcommittee Saturday appear to show that in
2007, at least, Goldmans short bets were eclipsing the losses on its long positions.
In May 2007, for instance, Goldman workers e-mailed one another about losses on a bundle of
mortgages issued by Long Beach Mortgage Securities. Though the firm lost money on those, a worker
wrote, there was good news: we own 10 mm in protection. That meant Goldman had enough of a bet
against the bond that, over all, it profited by $5 million.
On Oct. 11, 2007, one Goldman manager in the trading unit wrote to another, "Sounds like we will
make some serious money, and received the response, Yes we are well positioned.
Documents released by the Senate subcommittee appear to indicate that in July 2007, Goldmans
accounting showed losses of $322 million on positive mortgage positions, but its negative bet
what Mr. Viniar called the big short brought in $373 million.
As recently as a week ago, a Goldman spokesman emphasized that the firm had tried only to hedge
its mortgage holdings in 2007.
The firm said in its annual report this month that it did not know back then where housing was
headed, a sentiment expressed by Mr. Blankfein the last time he appeared before Congress.
We did not know at any minute what would happen next, even though there was a lot of writing, he
told the Financial Crisis Inquiry Commission in January.
It is not known how much money in total Goldman made on its negative housing bets. Neither Goldman
nor the panel issued information about Goldmans mortgage earnings in 2009
In its response Saturday, Goldman Sachs released an assortment of internal e-mail messages. They
showed workers disagreeing at some junctures over the direction of the mortgage market. In 2008,
Goldman was stung by some losses on higher-quality mortgage bonds it held, when the crisis
expanded from losses on risky bonds with subprime loans to losses in mortgages that were given to
people with better credit histories.
Still, in late 2006, there are messages that show Goldman executives discussing ways to get rid of
the firms positive mortgage positions by selling them to clients. In one message, Goldmans chief
financial officer, Mr. Viniar, wrote, Lets be aggressive distributing things.
-14-
Goldman also released detailed financial statements for its mortgage trading unit.
Those statements showed that a group of traders in what was known as the structured
products group made a profit of $3.69 billion as of Oct. 26, 2007, which more than
covered losses in other parts of Goldmans mortgage unit. Several traders from that
group will testify on Tuesday.
The messages released by Goldman included many written by Fabrice Tourre, the executive
who is the only Goldman employee named in the S.E.C. complaint. They reveal his
skepticism about the direction of the subprime mortgage market in 2007. In a March 7
message to his girlfriend, he wrote, According to Sparks, that business is totally
dead, and the poor little subprime borrowers will not last so long. He was referring
to Dan Sparks, then the head of Goldmans mortgage trading unit.
28. That same day, the Journal published its article Insiders Sold Shares As SEC Probed
Firm, detailing defendants illicit insider sales made while they, but not the public, knew of
the Wells Notice that had been issued to Goldman by the SEC.
29. Defendants attitude and actions in the face of a firestorm of criticism in the wake of
the recent global financial crisis are consistent with their knee-jerk, strong denials of
wrongdoing and their failure to disclose the Wells Notice. For instance, one needs to look no
further than the now-infamous comment defendant Blankfein made to The Times of London in November
2009, Im doing Gods work, in response to the recent public scrutiny over the Companys
excessive executive compensation practices,3 to understand defendants circle the
wagons mentality.
30. Indeed, rather than investigate the serious allegations of wrongdoing raised by the New
York Times, or later in the SEC Action, or take any other steps to properly inform themselves, the
Board has brashly stated that the SECs charges are completely unfounded in law and fact.
Clearly, Defendants, including the Board, have consistently and repeatedly taken the hard-line
stance that no wrongdoing could have possibly occurred at Goldman. Accordingly,
3 | That the SEC issued a Wells Notice to the Company at the same time that Goldman was already publicly under fire for its executive compensation practices and policies only underscores the impropriety of defendants failure to disclose the Wells Notice. |
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it would be wholly impossible to expect that the Board would be able to consider a stockholder
demand in good faith.
31. As a result of defendants breaches of fiduciary duty and other misconduct, the price of
the Companys stock still has not recovered and currently trades at around $152 per share a
plummet of approximately 18% in less than two weeks.
32. Accordingly, the Company has been damaged.
JURISDICTION AND VENUE
33. This Court has jurisdiction over all causes of action asserted herein pursuant to 28
U.S.C. §1332(a)(l) in that Plaintiffs and defendants are citizens of different states and/or
countries and the amount in controversy exceeds $75,000, exclusive of interest and costs. This
Court has supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a) over all other claims that are
so related to claims in the action within such original jurisdiction that they form part of the
same case or controversy under Article III of the United States Constitution. This action is not a
collusive action designed to confer jurisdiction on this court of a court of the United States
that it would not otherwise have.
34. This Court has jurisdiction over each defendant named herein because each defendant is
either a corporation that conducts business in and maintains operations in this District, or is an
individual who has sufficient minimum contacts with this District so as to render the exercise of
jurisdiction by the District courts permissible under traditional notions of fair play and
substantial justice.
35. Venue is proper in this Court pursuant to 28 U.S.C. §1391(a) because: (i) Goldman
maintains its principal place of business in this District; (ii) one or more of the defendants
either resides in or maintains executive offices in this District; (iii) a substantial
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portion of the transactions and wrongs complained of herein, including the defendants primary
participation in the wrongful acts detailed herein, and aiding and abetting and conspiracy in
violation of fiduciary duties owed to Goldman, occurred in this District; and (iv) defendants have
received substantial compensation in this District by doing business here and engaging in numerous
activities that had an effect in this District.
THE PARTIES
36. Plaintiff has continuously held Goldman stock since May 2007. Plaintiff is a citizen of
the state of California.
37. Nominal defendant Goldman is a Delaware corporation headquartered at 85 Broad Street, New
York, NY 10004. Goldman is a leading global financial services firm providing investment banking,
securities, and investment management services to a diversified client base that includes
corporations, financial institutions, governments, and high-net-worth individuals.
38. Defendant Blankfein has served as Chairman and CEO of Goldman since June 2006. In
addition, Blankfein has served as a director of the Company since April 2003. Upon information and
belief, defendant Blankfein is a citizen of the state of New York.
39. Defendant Cohn has served as the President and COO of the Company since April 2009. In
addition, defendant Cohen has served as a director of the Company since June 2006. Upon
information and belief, defendant Cohn is a citizen of the state of New York.
40. Defendant Bryan has served as a director of the Company since November 1999. In addition,
defendant Bryan has served as a member of the Boards Audit Committee (the Audit Committee)
during the Relevant Period. Upon information and belief, defendant Bryan is a citizen of the state
of Illinois.
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41. Defendant Claes Dahlback (Dahlback) has served as a director of the Company since June
2003. In addition, defendant Dahlback has served as a member of the Audit Committee during the
Relevant Period. Upon information and belief, defendant Dahlback is a citizen of Sweden.
42. Defendant Stephen Friedman (Friedman) has served as a director of the Company since
April 2005. In addition, defendant Friedman has served as a member of the Audit Committee during
the Relevant Period. Upon information and belief, defendant Friedman is a citizen of the state of
New York.
43. Defendant William W. George (George) has served as a director of the Company since
December 2002. In addition, defendant George has served as a member of the Audit Committee during
the Relevant Period. Upon information and belief, defendant George is citizen of the Commonwealth
of Massachusetts.
44. Defendant Rajat K. Gupta (Gupta) has served as a director of the Company since November
2006. In addition, defendant Gupta has served as a member of the Audit Committee during the
Relevant Period. Upon information and belief, defendant Gupta is a citizen of the state of
Connecticut.
45. Defendant James A. Johnson (Johnson) has served as a director of the Company since May
1999. In addition, defendant Johnson has served as a member of the Audit Committee during the
Relevant Period. Upon information and belief, defendant Johnson is a citizen of the District of
Columbia.
46. Defendant Lois D. Juliber (Juliber) has served as a director of the Company since March
2004. In addition, defendant Juliber has served as a member of the Audit Committee during the
Relevant Period. Upon information and belief, defendant Juliber is a
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citizen of the state of New York.
47. Defendant Lakshmi N. Mittal (Mittal) has served as a director of the Company since June
2008. In addition, defendant Mittal has served as a member of both the Audit Committee during the
Relevant Period. Upon information and belief, defendant Mittal is a citizen of the state of New
York.
48. Defendant James J. Schiro (Schiro) has served as a director of the Company since May
2009. In addition, defendant Schiro has served as a member of the Audit Committee during the
Relevant Period. Upon information and belief, defendant Schiro is a citizen of the state of New
York.
49. Defendant Ruth J. Simmons (Simmons) has served as a director of the Company since
January 2000. Upon information and belief, defendant Simmons is a citizen of Rhode Island.
50. Defendant Tourre has served as a registered representative with Goldman throughout the
Relevant Period. Upon information and belief, defendant Tourre is a citizen of England.
51. Defendant Pablo Salame (Salame) served as a sales and trading executive for the Company
during the Relevant Period. Upon information and belief, defendant Salame is a citizen of England.
52. Defendant Jonathan Egol (Egol) served as a Vice President of the Company during the
Relevant Period. Upon information and belief, defendant Egol is a citizen of England.
53. Defendant Viniar has served as the Companys Executive Vice President and CFO since 1999.
Upon information and belief, defendant Viniar is a citizen of the state of New York.
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54. Defendant Stecher has served as the Companys Executive Vice President, General Counsel,
and Co-Head of the Legal Department since December 2000. Upon information and belief, defendant
Stecher is a citizen of the state of New York.
55. Defendant J. Michael Evans (Evans) has served as a Vice Chairman of Goldman since
February 2008 and as Chairman of Goldman Sachs Asia since 2004. Upon information and belief,
defendant Evans is a citizen of China.
56. Defendant Michael S. Sherwood (Sherwood) has served as a Vice Chairman of Goldman since
February 2008 and as Co-CEO of Goldman Sachs International since 2005. Upon information and
belief, defendant Sherwood is a citizen of England.
57. Defendant Sarah E. Smith (Smith) has served as the Companys Principal Accounting
Officer since 2000. Upon information and belief, defendant Smith is a citizen of the state of New
York.
58. Defendants Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber,
Mittal, Schiro, Simmons, Viniar, Egol, Salame, Tourre, Stecher, Evans, Sherwood, and Smith shall
be referred to herein as Defendants.
59. Defendants Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal, and Schiro
shall be referred to herein as the Audit Committee Defendants.
60. Defendants Bryan, Stecher, Evans, Sherwood, and Smith shall be referred to herein as the
Insider Selling Defendants.
61. Defendants Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber,
Mittal, Schiro, and Simmons shall be collectively referred to herein as the Director Defendants.
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DEFENDANTS DUTIES
62. By reason of their positions as officers, directors, and/or fiduciaries of Goldman and
because of their ability to control the business and corporate affairs of Goldman, Defendants owed
Goldman and its shareholders fiduciary obligations of good faith, loyalty, and candor, and were and
are required to use their utmost ability to control and manage Goldman in a fair, just, honest, and
equitable manner. Defendants were and are required to act in furtherance of the best interests of
Goldman and its shareholders so as to benefit all shareholders equally and not in furtherance of
their personal interest or benefit. Each director and officer of the Company owes to Goldman and
its shareholders the fiduciary duty to exercise good faith and diligence in the administration of
the affairs of the Company and in the use and preservation of its property and assets, and the
highest obligations of fair dealing.
63. Defendants, because of their positions of control and authority as directors and/or
officers of Goldman, were able to and did, directly and/or indirectly, exercise control over the
wrongful acts complained of herein. Because of their advisory, executive, managerial, and
directorial positions with Goldman, each of the Defendants had knowledge of material nonpublic
information regarding the Company.
64. To discharge their duties, the officers and directors of Goldman were required to
exercise reasonable and prudent supervision over the management, policies, practices and controls
of the Company. By virtue of such duties, the officers and directors of Goldman were required to,
among other things:
a. | Exercise good faith to ensure that the affairs of the Company were conducted in an efficient, business-like manner so as to make it possible to provide the highest quality performance of their business; |
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b. | Exercise good faith to ensure that the Company was operated in a diligent, honest and prudent manner and complied with all applicable federal and state laws, rules, regulations and requirements, and all contractual obligations, including acting only within the scope of its legal authority; and | ||
c. | When put on notice of problems with the Companys business practices and operations, exercise good faith in taking appropriate action to correct the misconduct and prevent its recurrence. |
65. Goldmans Code of Business Conduct and Ethics, which applies to all employees
and members of our Board of Directors, states, among other things:
a. | Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do; | ||
b. | an employee or director must never use or attempt to use his or her position at the firm to obtain any improper personal benefit for himself or herself; | ||
c. | It is the firms policy that the information in its public communications, including SEC filings, be full, fair, accurate, timely, and understandable; | ||
d. | Employees and directors are prohibited from knowingly misrepresenting, omitting, or causing others to misrepresent or omit, material facts about the firm to others, whether within or outside the firm; | ||
e. | It is the firms policy to comply with all applicable laws, rules, and regulations. It is the personal responsibility of each employee and director to adhere to the standards and restrictions imposed by those laws, rules, and regulations; and | ||
f. | We have a history of succeeding through honest business competition. We |
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do not seek competitive advantages through illegal or unethical business practices. Each employee and director should endeavor to deal fairly with the firms clients, service providers, suppliers, competitors, and employees. No employee or director should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any unfair dealing practice. |
66. Pursuant to the Audit Committees Charter, the purposes of the Audit Committee include,
among other things, the oversight of the integrity of the Companys financial statements, the
Companys compliance with legal and regulatory requirements, the performance of the Companys
internal controls, and the Companys management of market, credit, liquidity and other financial
and operational risks.
67. Per the terms of the Audit Committee Charter, the members of the Audit Committee are
specifically required, among other things, to:
a. | Oversee the integrity of the Companys financial statements; | ||
b. | Oversee the Companys internal control over financial reporting; | ||
c. | Oversee the Companys management of market, credit, liquidity and other financial and operational risks; | ||
d. | Discuss with management earnings press releases and review generally the type and presentation of information to be included in earnings press releases; and | ||
e. | Review with management the type and presentation of any financial information and earnings guidance provided to analysts and rating agencies. |
-23-
SUBSTANTIVE ALLEGATIONS
Goldmans Correlation Trading Desk
68. Goldmans structured product correlation trading desk was created in and around late
2004/early 2005. Among the services it provided was the structuring and marketing of a series of
synthetic CDOs called ABACUS whose performance was tied to RMBS. Defendants sought to protect and
expand this profitable franchise in a competitive market both before and throughout the Relevant
Period.
69. It has been alleged that, according to an internal Goldman memorandum to the Goldman
Sachs Mortgage Capital Committee (MCC) dated March 12, 2007, the ability to structure and
execute complicated transactions to meet multiple clients needs and objectives is key for our
franchise, and [e]xecuting this transaction [ABACUS 2007-AC1] and others like it helps position
Goldman to compete more aggressively in the growing market for synthetics written on structured
products.
Paulsons Investment Strategy
70. Paulson is a hedge fund founded in 1994. Beginning in 2006, Paulson created two funds,
known as the Paulson Credit Opportunity Funds, which took a bearish view on subprime mortgage
loans by buying protection through CDS on various debt securities. A CDS is an over-the-counter
derivative contract under which a protection buyer makes periodic premium payments and the
protection seller makes a contingent payment if a reference obligation experiences a credit event.
71. RMBS are securities backed by residential mortgages. Investors receive payments out of
the interest and principal on the underlying mortgages. Paulson developed an investment strategy
based upon the belief that, for a variety of reasons, certain mid-and-subprime
-24-
RMBS rated Triple B, meaning bonds rated BBB by S&P or Baa2 by Moodys, would experience
credit events. The Triple B tranche is the lowest investment grade RMBS and, after equity, the
first part of the capital structure to experience losses associated with a deterioration of the
underlying mortgage loan portfolio.
72. CDOs are debt securities collateralized by debt obligations including RMBS. These
securities are packaged and generally held by a special purpose vehicle (SPV) that issues notes
entitling their holders to payments derived from the underlying assets. In a synthetic CDO, the
SPV does not actually own a portfolio of fixed income assets, but rather enters into CDSs that
reference the performance of a portfolio (the SPV does hold some collateral securities separate
from the reference portfolio that it uses to make payment obligations).
73. Paulson came to believe that synthetic CDOs whose reference assets consisted of certain
Triple B-rated mid-and-subprime RMBS would experience significant losses and, under certain
circumstances, even the more senior AAA-rated tranches of these so-called mezzanine CDOs would
become worthless.
Under Defendants Direction, Goldman and Paulson Discuss a Proposed Transaction
74. It has been alleged that Paulson performed an analysis of recent-vintage Triple B-rated
RMBS and identified various bonds it expected to experience credit events. Paulson then asked
Defendants to help it buy protection, through the use of CDS, on the RMBS it had adversely
selected, meaning chosen in the belief that the bonds would experience credit events.
75. It has also been alleged that Paulson discussed with Defendants possible transactions in
which counterparties to its short positions might be found. Among the transactions considered were
synthetic CDOs whose performance was tied to Triple B-rated RMBS. Paulson discussed with
Defendants the creation of a CDO that would allow Paulson to
-25-
participate in selecting a portfolio of reference obligations and then effectively short the
RMBS portfolio it helped select by entering into CDS with Goldman to buy protection on specific
layers of the synthetic CDOs capital structure.
76. It has been alleged that a Paulson employee explained the investment opportunity
as of January 2007 as follows:
It is true that the market is not pricing the subprime RMBS wipeout scenario. In my
opinion this situation is due to the fact that rating agencies, CDO managers and
underwriters have all the incentives to keep the game going, while real money
investors have neither the analytical tools nor the institutional framework to take
action before the losses that one could anticipate based [on] the news available
everywhere are actually realized.
77. At the same time, Defendants recognized that market conditions were presenting challenges
to the successful marketing of CDO transactions backed by mortgage-related securities. For
example, it has been alleged that portions of an email in both French and English sent by
defendant Tourre to a friend on January 23, 2007 stated (in English translation where applicable):
More and more leverage in the system, The whole building is about to collapse anytime now ...
Only potential survivor, the fabulous Fab [rice Tourre] ... standing in the middle of all these
complex, highly leveraged, exotic trades he created without necessarily understanding all of the
implications of those monstruosities!!!
78. Similarly, it has been alleged that an email dated February 11, 2007 to defendant Tourre
from the head of the Goldman structured product correlation trading desk stated in part, the cdo
biz is dead we dont have a lot of time left.
Introduction of ACA to the Proposed Transaction
79. Defendants knew that it would be difficult, if not impossible, to place the
liabilities of a synthetic CDO if they disclosed to investors that a short investor, such as
Paulson, played a significant role in the collateral selection process. By contrast, they knew that
the
-26-
identification of an experienced and independent third-party collateral manager as having selected
the portfolio would facilitate the placement of the CDO liabilities in a market that was beginning
to show signs of distress.
80. Defendants also knew that at least one significant potential investor, IKB Deutsche
Industriebank AG (IKB), was unlikely to invest in the liabilities of a CDO that did not utilize
a collateral manager to analyze and select the reference portfolio.
81. Defendants therefore sought a collateral manager to play a role in the transaction
proposed by Paulson. It has been alleged that contemporaneous internal correspondence reflects
that Defendants recognized that not every collateral manager would agree to the type of names [of
RMBS] Paulson want[s] to use and put its name at risk...on a weak quality portfolio.
82. In or about January 2007, Defendants approached ACA and proposed that it serve as the
Portfolio Selection Agent for a CDO transaction sponsored by Paulson. ACA previously had
constructed and managed numerous CDOs for a fee. As of December 31, 2006, ACA had closed on 22 CDO
transactions with underlying portfolios consisting of $15.7 billion of assets.
83. It has been alleged that internal Goldman communications emphasized the advantages from a
marketing perspective of having ACA associated with the transaction. For example, an internal
email from defendant Tourre dated February 7, 2007, stated:
One thing that we need to make sure ACA understands is that we want their name on this
transaction. This is a transaction for which they are acting as portfolio selection
agent, this will be important that we can use ACAs branding to help distribute the
bonds.
84. Likewise, it has been alleged that an internal Goldman memorandum to the
Goldman Sachs MCC dated March 12, 2007 described the marketing advantages of ACAs
brand-name and credibility:
-27-
We expect the strong brand-name of ACA as well as our market-leading position in
synthetic CDOs of structured products to result in a successful offering.
We expect that the role of ACA as Portfolio Selection Agent will broaden the investor
base for this and future ABACUS offerings.
We intend to target suitable structured product investors who have previously
participated in ACA-managed cashflow CDO transactions or who have previously
participated in prior ABACUS transactions.
We expect to leverage ACAs credibility and franchise to help distribute this
Transaction.
Paulsons Participation In the Collateral Selection Process
85. In late 2006 and early 2007, it has been alleged that Paulson performed an analysis of
recent-vintage Triple B RMBS and identified over 100 bonds it expected to experience credit events
in the near future. Paulsons selection criteria favored RMBS that included a high percentage of
adjustable rate mortgages, relatively low borrower FICO scores, and a high concentration of
mortgages in states like Arizona, California, Florida and Nevada that had recently experienced high
rates of home price appreciation. Paulson informed Defendants that it wanted the reference
portfolio for the contemplated transaction to include the RMBS it identified or bonds with similar
characteristics.
86. It has been alleged that on January 8, 2007, defendant Tourre attended a meeting with
representatives from Paulson and ACA at Paulsons offices in New York City to discuss the proposed
transaction.
87. It has also been alleged that, on January 9, 2007, Goldman personnel sent an email to ACA
with the subject line, Paulson Portfolio. Attached to the email was a list of 123 2006 RMBS
rated Baa2. On January 9, 2007, ACA performed an overlap analysis and determined that it
previously had purchased 62 of the 123 RMBS on Paulsons list at the same or lower ratings.
88. It has further been alleged that on January 9, 2007, representatives from Goldman
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informed ACA that Tourre was very excited by the initial portfolio feedback.
89. It has also been alleged that on January 10, 2007, defendant Tourre sent an email to ACA
with the subject line, Transaction Summary. The text of defendant Tourres email began, we
wanted to summarize ACAs proposed role as Portfolio Selection Agent for the transaction that
would be sponsored by Paulson (the Transaction Sponsor). The email continued in relevant part,
"[s]tarting portfolio would be ideally what the Transaction Sponsor shared, but there is
flexibility around the names.
90. It has been alleged that on January 22, 2007, ACA sent an email to Tourre and additional
Goldman personnel with the subject line, Paulson Portfolio l-22-10.xls. The text of the email
began, Attached please find a worksheet with 86 sub-prime mortgage positions that we would
recommend taking exposure to synthetically. Of the 123 names that were originally submitted to us
for review, we have included only 55.
91. It has been alleged that on January 27, 2007, ACA met with a Paulson representative in
Jackson Hole, Wyoming, and they discussed the proposed transaction and reference portfolio. The
next day, on January 28, 2007, ACA summarized the meeting in an email to Tourre. Defendant Tourre
responded via email later that day, this is confirming my initial impression that [Paulson]
wanted to proceed with you subject to agreement on portfolio and compensation structure.
92. It has further been alleged that on February 2, 2007, Paulson, Tourre, and ACA met at
ACAs offices in New York City to discuss the reference portfolio. Unbeknownst to ACA at the time,
Paulson intended to effectively short the RMBS portfolio it helped select by entering into CDS
with Goldman to buy protection on specific layers of the synthetic CDOs capital structure.
-29-
93. Defendant Tourre and the other Defendants, of course, were fully aware that Paulsons
economic interests with respect to the quality of the reference portfolio were directly adverse to
CDO investors. During the meeting, defendant Tourre sent an email to another Goldman employee
stating, I am at this aca paulson meeting, this is surreal. Later that same day, ACA emailed
Paulson, Tourre, and other Goldman personnel a list of 82 RMBS on which Paulson and ACA concurred,
plus a list of 21 replacement RMBS. ACA sought Paulsons approval of the revised list, asking,
Let me know if these work for you at the Baa2 level.
94. It has also been alleged that on February 5, 2007, Paulson sent an email to ACA, with a
copy to defendant Tourre, deleting eight RMBS recommended by ACA, leaving the rest, and stating
that defendant Tourre agreed that 92 bonds were a sufficient portfolio.
95. Additionally, it has been alleged that on February 5, 2007, an internal ACA email asked,
Attached is the revised portfolio that Paulson would like us to commit to all names are at the
Baa2 level. The final portfolio will have between 80 and these 92 names. Are we ok to say yes on
this portfolio? The response was, Looks good to me. Did [Paulson] give a reason why they kicked
out all the Wells [Fargo] deals? Wells Fargo was generally perceived as one of the higher-quality
subprime loan originators.
96. Lastly, it has been alleged that on or about February 26, 2007, after further
discussion, Paulson and ACA came to an agreement on a reference portfolio of 90 RMBS for
ABACUS 2007-AC1.
Under Defendants Direction, Goldman Represented That ACA Selected the Portfolio
Without Disclosing Paulsons Significant Role in Determining the Portfolio and Its Adverse
Economic Interests
Without Disclosing Paulsons Significant Role in Determining the Portfolio and Its Adverse
Economic Interests
97. Goldmans marketing materials for ABACUS 2007-AC1, prepared under
Defendants direction, were materially false and misleading because they represented that ACA
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selected the reference portfolio while omitting any mention that Paulson, a party with
economic interests adverse to CDO investors, played a significant role in the selection of the
reference portfolio.
98. For example, a 9-page term sheet for ABACUS 2007-AC1 on or about February 26, 2007,
described ACA as the Portfolio Selection Agent and stated in bold print at the top of the first
page that the reference portfolio of RMBS had been selected by ACA. This document contained no
mention of Paulson, its economic interests in the transaction, or its role in selecting the
reference portfolio.
99. Similarly, a 65-page flip book for ABACUS 2007-AC1 on or about February 26, 2007
represented on its cover page that the reference portfolio of RMBS had been Selected by ACA
Management, LLC. The flip book included a 28-page overview of ACA describing its business
strategy, senior management team, investment philosophy, expertise, track record and credit
selection process, together with a 7-page section of biographical information on ACA officers and
employees. Investors were assured that the party selecting the portfolio had an alignment of
economic interest with investors. This document contained no mention of Paulson, its economic
interests in the transaction, or its role in selecting the reference portfolio.
100. It has been alleged that defendant Tourre had primary responsibility for preparing the
term sheet and flip book.
101. The Goldman Sachs MCC, which included senior-level members of management of Goldman,
approved the ABACUS 2007-AC1 on or about March 12, 2007. Defendants expected to earn between
$15-20 million for structuring and marketing ABACUS 2007-AC1.
102. On or about April 26, 2007, Defendants finalized a 178-page offering memorandum for
ABACUS 2007-AC1. The cover page of the offering memorandum included a
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description of ACA as Portfolio Selection Agent. The Transaction Overview, Summary and Portfolio
Selection Agent sections of the memorandum all represented that the reference portfolio of RMBS had
been selected by ACA. This document contained no mention of Paulson, its economic interests in the
transaction, or its role in selecting the reference portfolio.
103. It has been alleged that defendant Tourre reviewed at least the Summary section of the
offering memorandum before it was sent to potential investors.
104. It has been alleged that although the marketing materials for ABACUS 2007-AC1 made no
mention of Paulson or its role in the transaction, internal Goldman communications clearly
identified Paulson, its economic interests, and its role in the transaction. For example, the
March 12, 2007 MCC memorandum describing the transaction stated, Goldman is effectively working
an order for Paulson to buy protection on specific layers of the [ABACUS 2007-]AC1 capital
structure.
Defendants Misled ACA Into Believing Paulson Was Long Equity
105. Defendants also misled ACA into believing that Paulson was investing in the equity of
ABACUS 2007-AC1 and therefore shared a long interest with CDO investors. The equity tranche is at
the bottom of the capital structure and the first to experience losses associated with
deterioration in the performance of the underlying RMBS. Equity investors therefore have an
economic interest in the successful performance of a reference RMBS portfolio. As of early 2007,
ACA had participated in a number of CDO transactions involving hedge funds that invested in the
equity tranche.
106. Had ACA been aware that Paulson was taking a short position against the CDO, ACA would
have likely been reluctant to allow Paulson to occupy an influential role in the selection of the
reference portfolio because it would present serious reputational risk to ACA,
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which was in effect endorsing the reference portfolio. In fact, it is unlikely that ACA would
have served as portfolio selection agent had it known that Paulson was taking a significant short
position instead of a long equity stake in ABACUS 2007-AC1.
107. It has been alleged that, on January 8, 2007, defendant Tourre attended a meeting with
representatives from Paulson and ACA at Paulsons offices in New York City to discuss the proposed
transaction. Paulsons economic interest was unclear to ACA, which sought further clarification
from Goldman. Later that day, ACA sent a Goldman sales representative an email with the subject
line Paulson meeting that read:
I have no idea how it went I wouldnt say it went poorly, not at all, but I think
it didnt help that we didnt know exactly how they [Paulson] want to participate in
the space. Can you get us some feedback?
108. On January 10, 2007, defendant Tourre emailed ACA a Transaction Summary that included
a description of Paulson as the Transaction Sponsor and referenced a Contemplated Capital
Structure with a [0]% [9]%: pre-committed first loss as part of the Paulson deal structure.
The description of this [0]% [9]% tranche at the bottom of the capital structure was consistent
with the description of an equity tranche and ACA reasonably believed it to be a reference to the
equity tranche. In fact, Defendants never intended to market to anyone a [0]% [9]% first loss
equity tranche in this transaction.
109. It has been alleged that on January 12, 2007, defendant Tourre spoke by telephone with
ACA about the proposed transaction. Following that conversation, on January 14, 2007, ACA sent an
email to the Goldman sales representative raising questions about the proposed transaction and
referring to Paulsons equity interest. The email, which had the subject line Call with Fabrice
[Tourre] on Friday, read in pertinent part:
I certainly hope I didnt come across too antagonistic on the call with Fabrice
[Tourre] last week but the structure looks difficult from a debt investor perspective.
I can understand Paulsons equity perspective but for us to put our name on something,
we have to be sure it enhances our reputation.
-33-
110. It has been alleged that on January 16, 2007, the Goldman sales representative
forwarded that email to defendant Tourre. As of that date, defendant Tourre knew, or was reckless
in not knowing, that ACA had been misled into believing Paulson intended to invest in the equity of
ABACUS 2007-AC1.
111. Based upon the January 10, 2007, Transaction Summary sent by defendant Tourre, the
January 12, 2007 telephone call with defendant Tourre and continuing communications with Tourre
and other Goldman personnel, ACA continued to believe through the course of the transaction that
Paulson would be an equity investor in ABACUS 2007-AC1.
112. On February 12, 2007, ACAs Commitments Committee approved the firms participation in
ABACUS as portfolio selection agent. It has been alleged that the written approval memorandum
described Paulsons role as follows: the hedge fund equity investor wanted to invest in the 0- 9%
tranche of a static mezzanine ABS CDO backed 100% by subprime residential mortgage securities.
Handwritten notes from the meeting reflect discussion of portfolio selection work with the equity
investor.
ABACUS 2007-AC1 Investors
A. IKB
113. IKB is a commercial bank headquartered in Dusseldorf, Germany. Historically, IKB
specialized in lending to small and medium-sized companies. Beginning in and around 2002, IKB, for
itself and as an advisor, was involved in the purchase of securitized assets referencing, or
consisting of, consumer credit risk including RMBS CDOs backed by U.S. mid- and-subprime
mortgages. IKBs former subsidiary, IKB Credit Asset Management GmbH, provided investment advisory
services to various purchasing entities participating in a commercial paper conduit known as the
Rhineland programme conduit.
-34-
114. The identity and experience of those involved in the selection of CDO portfolios was
an important investment factor for IKB. It has been alleged that in late 2006 IKB informed a
Goldman sales representative and defendant Tourre that it was no longer comfortable investing in
the liabilities of CDOs that did not utilize a collateral manager, meaning an independent
third-party with knowledge of the U.S. housing market and expertise in analyzing RMBS. Defendant
Tourre and other Goldman personnel knew that ACA was a collateral manager likely to be acceptable
to IKB.
115. In February, March and April 2007, under Defendants direction, Goldman sent IKB copies
of the ABACUS 2007-AC1 term sheet, flip book and offering memorandum, all of which represented
that the RMBS portfolio had been selected by ACA and omitted any reference to Paulson, its role in
selecting the reference portfolio and its adverse economic interests. Those representations and
omissions were materially false and misleading because, unbeknownst to IKB, Paulson played a
significant role in the collateral selection process and had financial interests in the
transaction directly adverse to IKB. Defendants did not inform IKB of Paulsons participation in
the collateral selection process and its adverse economic interests.
116. It has been alleged that the first written marketing materials for ABACUS 2007-AC1 were
distributed on February 15, 2007, when Defendants emailed a preliminary term sheet and reference
portfolio to the Goldman sales representative covering IKB. Defendant Tourre was aware these
materials would be delivered to IKB.
117. It has been further alleged that on February 19, 2007, a Goldman sales representative
forwarded the marketing materials to IKB, explaining via email: Attached are details of the ACA
trade we spoke about with Fabrice [Tourre] in which you thought the AAAs would be interesting.
-35-
118. It has been further alleged that defendant Tourre maintained direct and indirect contact
with IKB in an effort to close the deal. This included a March 6, 2007 email to the Goldman sales
representative for IKB representing that, This is a portfolio selected by ACA ... Defendant
Tourre subsequently described the portfolio in an internal Goldman email as having been selected
by ACA/Paulson.
119. ABACUS 2007-AC1 closed on or about April 26, 2007. It has been alleged that IKB bought
$50 million worth of Class A-l notes at face value. The Class A-l Notes paid a variable interest
rate equal to LIBOR plus 85 basis points and were rated Aaa by Moodys Investors Services, Inc.
(Moodys) and AAA by Standard & Poors Ratings & Services (S&P). IKB bought $100 million worth
of Class A-2 Notes at face value. The Class A-2 Notes paid a variable interest rate equal to LIBOR
plus 110 basis points and were rated Aaa by Moodys and AAA by S&P.
120. It has been alleged that the fact that the portfolio had been selected by an independent
third-party with experience and economic interests aligned with CDO investors was important to
IKB. IKB would not have invested in the transaction had it known that Paulson played a significant
role in the collateral selection process while intending to take a short position in ABACUS 2007-
AC1. Among other things, knowledge of Paulsons role would have seriously undermined IKBs
confidence in the portfolio selection process and led senior IKB personnel to oppose the
transaction.
121. Within months of closing, ABACUS 2007-AC1 s Class A-l and A-2 Notes were nearly
worthless. IKB lost almost all of its $150 million investment. Most of this money was ultimately
paid to Paulson in a series of transactions between Goldman and Paulson.
-36-
B ACA/ABN AMRO
122. It has been alleged that ACAs parent company, ACA Capital Holdings, Inc. (ACA
Capital), provided financial guaranty insurance on a variety of structured finance products
including RMBS CDOs, through its wholly-owned subsidiary, ACA Financial Guaranty Corporation. On or
about May 31, 2007, ACA Capital sold protection or wrapped the $909 million super senior tranche
of ABACUS 2007-AC1, meaning that it assumed the credit risk associated with that portion of the
capital structure via a CDS in exchange for premium payments of approximately 50 basis points per
year.
123. It has further been alleged that ACA Capital was unaware of Paulsons short position in
the transaction. It is unlikely that ACA Capital would have written protection on the super senior
tranche if it had known that Paulson, which played an influential role in selecting the reference
portfolio, had taken a significant short position instead of a long equity stake in ABACUS
2007-AC1.
124. The super senior transaction with ACA Capital was intermediated by ABN AMRO Bank N.V.
(ABN), which was one of the largest banks in Europe during the Relevant Period. This meant that,
through a series of CDS between ABN and Goldman and between ABN and ACA that netted ABN premium
payments of approximately 17 basis points per year, ABN assumed the credit risk associated with
the super senior portion of ABACUS 2007-ACls capital structure in the event ACA Capital was
unable to pay.
125. Under Defendants direction, Goldman sent ABN copies of the ABACUS 2007-AC1 term sheet,
flip book and offering memorandum, all of which represented that the RMBS portfolio had been
selected by ACA and omitted any reference to Paulsons role in the collateral selection process
and its adverse economic interest. Defendant Tourre also told ABN in emails
-37-
that ACA had selected the portfolio. These representations and omissions were materially false
and misleading because, unbeknownst to ABN, Paulson played a significant role in the collateral
selection process and had a financial interest in the transaction that was adverse to ACA Capital
and ABN.
126. At the end of 2007, ACA Capital was experiencing severe financial difficulties. In early
2008, ACA Capital entered into a global settlement agreement with its counterparties to effectively
unwind approximately $69 billion worth of CDSs, approximately $26 billion of which were related to
2005-06 vintage subprime RMBS. ACA Capital is currently operating as a run-off financial guaranty
insurance company.
127. In late 2007, ABN was acquired by a consortium of banks that included the Royal Bank of
Scotland (RBS). On or about August 7, 2008, RBS unwound ABNs super senior position in ABACUS
2007-AC1 by paying Goldman $840,909,090. Most of this money was subsequently paid by Goldman to
Paulson.
Defendants False and Misleading Public Statements During the Relevant Period
128. Throughout the Relevant Period, notwithstanding the events described above, Defendants
repeatedly stated in the Companys public filings that their goal was to protect their clients
interests. For instance, in the Companys Annual Report on Form 10-K filed on January 29, 2008,
Defendants claimed:
Our current structure, which is organized by regional, industry and product groups,
seeks to combine client-focused investment bankers with execution and industry
expertise. We continually assess and adapt our organization to meet the demands of our
clients in each geographic region. Through our commitment to teamwork, we believe that
we provide services in an integrated fashion for the benefit of our clients.
Our goal is to make available to our clients the entire resources of the firm in a
seamless fashion, with investment banking serving as front of the house. To
accomplish this objective, we focus on coordination among our equity and debt
underwriting activities and our corporate risk and liability management activities.
-38-
This coordination is intended to assist our investment banking clients in managing
their asset and liability exposures and their capital.
129. The above-quoted passage was also included verbatim in the Companys Annual Report on
Form 10-K filed with the SEC on January 27, 2009, which was signed by, among others, defendants
Viniar, Blankfein, Bryan, Cohn, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal,
Simmons, and Smith.
130. Not only have Defendants repeatedly touted the Companys ability to manag[e] [their
clients] asset and liability exposures and their capital, but they also have failed to disclose
any indications that the SEC was investigating Goldman or that the Company received a Wells Notice
in July 2009. For instance, in the Companys Annual Report on Form 10-K filed on March 1, 2010,
the Legal Proceedings section states the following, in pertinent part:
Item 3. Legal Proceedings
We are involved in a number of judicial, regulatory and arbitration proceedings
(including those described below) concerning matters arising in connection with the
conduct of our businesses. We believe, based on currently available information, that
the results of such proceedings, in the aggregate, will not have a material adverse
effect on our financial condition, but might be material to our operating results for
any particular period, depending, in part, upon the operating results for such period.
Given the range of litigation and investigations presently under way, our litigation
expenses can be expected to remain high.
IPO Process Matters
Group Inc. and GS&Co. are among the numerous financial services companies that have
been named as defendants in a variety of lawsuits alleging improprieties in the process
by which those companies participated in the underwriting of public offerings in recent
years.
* * *
World Online Litigation
In March 2001, a Dutch shareholders association initiated legal proceedings for an
unspecified amount of damages against GSI and others in Amsterdam District Court in
connection with the initial public offering of World Online in March 2000, alleging
misstatements and omissions in the offering materials and that the market was
artificially inflated by improper public statements and stabilization activities.
Goldman Sachs and ABN AMRO Rothschild served as joint global coordinators of the
approximately2.9 billion offering. GSI underwrote
-39-
20,268,846 shares and GS&Co. underwrote 6,756,282 shares for a total offering price of
approximately 1.16 billion.
* * *
Research Independence Matters
GS&Co. is one of several investment firms that have been named as defendants in substantively
identical purported class actions filed in the U.S. District Court for the Southern District of New
York alleging violations of the federal securities laws in connection with research coverage of
certain issuers and seeking compensatory damages. In one such action, relating to coverage of RSL
Communications, Inc. commenced on July 15, 2003, GS&Co.s motion to dismiss the complaint was
denied. The district court granted the plaintiffs motion for class certification and the U.S.
Court of Appeals for the Second Circuit, by an order dated January 26, 2007, vacated the district
courts class certification and remanded for reconsideration. By a decision dated August 4, 2009,
the district court granted plaintiffs renewed motion seeking class certification. Defendants
petition with the appellate court seeking review of the certification ruling was denied on January
25, 2010.
* * *
Enron Litigation Matters
Goldman Sachs affiliates are defendants in certain actions relating to Enron Corp., which filed
for protection under the U.S. bankruptcy laws on December 2, 2001.
* * *
Montana Power Litigation
GS&Co. and Group Inc. have been named as defendants in two actions relating to financial advisory
work rendered to Montana Power Company. On November 13, 2009, all parties entered into a
settlement and the settlement was preliminarily approved on February 10, 2010. A final hearing has
been scheduled for May 20, 2010 to May 21, 2010.
* * *
Adelphia Communications Fraudulent Conveyance Litigation
GS&Co. is among numerous entities named as defendants in two adversary proceedings commenced in
the U.S. Bankruptcy Court for the Southern District of New York, one on July 6, 2003 by a
creditors committee, and the second on or about July 31, 2003 by an equity committee of Adelphia
Communications, Inc. Those proceedings have now been consolidated in a single amended complaint
filed by the Adelphia Recovery Trust on October 31, 2007. The complaint seeks, among other things,
to recover, as fraudulent conveyances, payments made allegedly by Adelphia Communications, Inc.
and its affiliates to certain brokerage firms, including approximately $62.9 million allegedly
paid to GS&Co., in respect of margin calls made in the ordinary course of business on accounts
owned by members of the family that formerly controlled Adelphia Communications, Inc. By a
decision dated May 4, 2009, the district court denied
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GS&Co.s motion to dismiss the claim related to margin payments. GS&Co. moved for
reconsideration, and by a decision dated June 15, 2009, the district court granted the motion
insofar as requiring plaintiff to amend its complaint to specify the source of the margin payments
to GS&Co. By a decision dated July 30, 2009, the district court held that the sufficiency of the
amended claim would be determined at the summary judgment stage.
Specialist Matters
Spear, Leeds & Kellogg Specialists LLC (SLKS) and certain affiliates have received requests for
information from various governmental agencies and self-regulatory organizations as part of an
industry-wide investigation relating to activities of floor specialists in recent years. Goldman
Sachs has cooperated with the requests.
* * *
Treasury Matters
On September 4, 2003, the SEC announced that GS&Co. had settled an administrative proceeding
arising from certain trading in U.S. Treasury bonds over an approximately eight-minute period
after GS&Co. received an October 31, 2001 telephone call from a Washington, D.C.-based political
consultant concerning a forthcoming Treasury refunding announcement. Without admitting or denying
the allegations, GS&Co. consented to the entry of an order that, among other things, (i) censured
GS&Co.; (ii) directed GS&Co. to cease and desist from committing or causing any violations of
Sections 15(c)(1)(A) and (C) and 15(f) of, and Rule 15c 1-2 under, the Exchange Act; (iii) ordered
GS&Co. to pay disgorgement and prejudgment interest in the amount of $1,742,642, and a civil
monetary penalty of $5 million; and (iv) directed GS&Co. to conduct a review of its policies and
procedures and adopt, implement and maintain policies and procedures consistent with the order and
that review. GS&Co. also undertook to pay $2,562,740 in disgorgement and interest relating to
certain trading in U.S. Treasury bond futures during the same eight-minute period.
* * *
Mutual Fund Matters
GS&Co. and certain mutual fund affiliates have received subpoenas and requests for information
from various governmental agencies and self-regulatory organizations including the SEC as part of
the industry-wide investigation relating to the practices of mutual funds and their customers.
GS&Co. and its affiliates have cooperated with such requests.
Refco Securities Litigation
GS&Co. and the other lead underwriters for the August 2005 initial public offering of 26,500,000
shares of common stock of Refco Inc. are among the defendants in various putative class actions
filed in the U.S. District Court for the Southern District of New York beginning in October 2005
by investors in Refco Inc. in response to certain publicly reported events that culminated in the
October 17, 2005 filing by Refco Inc. and certain affiliates for protection under U.S. bankruptcy
laws. The actions, which have been consolidated, allege violations of
-41-
the disclosure requirements of the federal securities laws and seek compensatory damages. In
addition to the underwriters, the consolidated complaint names as defendants Refco Inc. and certain
of its affiliates, certain officers and directors of Refco Inc., Thomas H. Lee Partners, L.P.
(which held a majority of Refco Inc.s equity through certain funds it manages), Grant Thornton
(Refco Inc.s outside auditor), and BAWAG P.S.K. Bank fur Arbeit und Wirtschaft und Osterreichische
Postsparkasse Aktiengesellschaft (BAWAG). Lead plaintiffs entered into a settlement with BAWAG,
which was approved following certain amendments on June 29, 2007. GS&Co. underwrote 5,639,200
shares of common stock at a price of $22 per share for a total offering price of approximately $124
million.
* * *
Short-Selling Litigation
Group Inc., GS&Co. and Goldman Sachs Execution & Clearing, L.P. are among the numerous financial
services firms that have been named as defendants in a purported class action filed on April 12,
2006 in the U.S. District Court for the Southern District of New York by customers who engaged in
short-selling transactions in equity securities since April 12, 2000. The amended complaint
generally alleges that the customers were charged fees in connection with the short sales but that
the applicable securities were not necessarily borrowed to effect delivery, resulting in failed
deliveries, and that the defendants conspired to set a minimum threshold borrowing rate for
securities designated as hard to borrow. The complaint asserts a claim under the federal antitrust
laws, as well as claims under the New York Business Law and common law, and seeks treble damages
as well as injunctive relief. Defendants motion to dismiss the complaint was granted by a
decision dated December 20, 2007. On December 3, 2009, the dismissal was affirmed by the U.S.
Court of Appeals for the Second Circuit.
Fannie Mae Litigation
GS&Co. was added as a defendant in an amended complaint filed on August 14, 2006 in a purported
class action pending in the U.S. District Court for the District of Columbia. The complaint
asserts violations of the federal securities laws generally arising from allegations concerning
Fannie Maes accounting practices in connection with certain Fannie Mae-sponsored REMIC
transactions that were allegedly arranged by GS&Co. The other defendants include Fannie Mae,
certain of its past and present officers and directors, and accountants. By a decision dated May
8, 2007, the district court granted GS&Co.s motion to dismiss the claim against it. The time for
an appeal will not begin to run until disposition of the claims against other defendants.
* * *
Compensation Related Litigation
On March 16, 2007, Group Inc., its board of directors, executive officers and members of its
management committee were named as defendants in a purported shareholder derivative action in the
U.S. District Court for the Eastern District of New York challenging the sufficiency of the firms
February 21, 2007 Proxy Statement and the compensation of certain employees. The complaint
generally alleges that the Proxy Statement undervalues stock option awards disclosed therein, that
the recipients received excessive awards because the proper methodology was not followed, and that
the firms senior management received
-42-
excessive compensation, constituting corporate waste. The complaint seeks, among other things,
an injunction against the 2007 Annual Meeting of Shareholders, the voiding of any election of
directors in the absence of an injunction and an equitable accounting for the allegedly excessive
compensation. 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.
* * *
Mortgage-Related Matters
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.
* * *
Auction Products Matters
On August 21, 2008, GS&Co. entered into a settlement in principle with the Office of Attorney
General of the State of New York and the Illinois Securities Department (on behalf of the North
American Securities Administrators Association) regarding auction rate securities. On June 2,
2009, GS&Co. entered into an Assurance of Discontinuance with the Office of Attorney General of
the State of New York. Under the agreement, Goldman Sachs agreed, among other things, (i) to offer
to repurchase at par the outstanding auction rate securities that its private wealth management
clients purchased through the firm prior to February 11, 2008, with the exception of those auction
rate securities where auctions are clearing, (ii) to continue to work with issuers and other
interested parties, including regulatory and governmental entities, to expeditiously provide
liquidity solutions for institutional investors, and (iii) to pay a $22.5 million fine. The
settlement, which is subject to definitive documentation and approval by the various states, other
than New York, does not resolve any potential regulatory action by the SEC. On June 2, 2009,
GS&Co. entered into an Assurance of Discontinuance with the New York Attorney General.
* * *
Private Equity-Sponsored Acquisitions Litigation
Group Inc. and GS Capital Partners are among numerous private equity firms and investment banks
named as defendants in a federal antitrust action filed in the U.S. District Court for the
District of Massachusetts in December 2007. As amended, the complaint generally alleges that the
defendants have colluded to limit competition in bidding for private equity-sponsored acquisitions
of public companies, thereby resulting in lower prevailing bids and, by extension, less
consideration for shareholders of those companies in violation of Section 1 of the U.S. Sherman
Antitrust Act and common law. Defendants moved to dismiss on August 27, 2008. By an order dated
November 19, 2008, the district court dismissed claims relating to certain transactions that were
the subject of releases
-43-
as part of the settlement of shareholder actions challenging such transactions, and by an
order dated December 15, 2008 otherwise denied the motion to dismiss.
Washington Mutual Securities Litigation
GS&Co. is among numerous underwriters named as defendants in a putative securities class action
amended complaint filed on August 5, 2008 in the U.S. District Court for the Western District of
Washington. As to the underwriters, plaintiffs allege that the offering documents in connection
with various securities offerings by Washington Mutual, Inc. failed to describe accurately the
companys exposure to mortgage-related activities in violation of the disclosure requirements of
the federal securities laws. The defendants include past and present directors and officers of
Washington Mutual, the companys former outside auditors, and numerous underwriters. By a decision
dated May 15, 2009, the district court granted in part and denied in part the underwriter
defendants motion to dismiss, with leave to replead, and on June 15, 2009, plaintiffs filed an
amended complaint. By a decision dated October 27, 2009, the federal district court granted and
denied in part the underwriters motion to dismiss.
* * *
Britannia Bulk Securities Litigation
GS&Co. is among the underwriters named as defendants in numerous putative securities class actions
filed beginning on November 6, 2008 in the U.S. District Court for the Southern District of New
York arising from the June 17, 2008 $125 million initial public offering of common stock of
Britannia Bulk Holdings, Inc. The complaints name as defendants the company, certain of its
directors and officers, and the underwriters for the offering. Plaintiffs allege that the offering
materials violated the disclosure requirements of the federal securities laws and seek
compensatory damages. By a decision dated October 19, 2009, the district court granted the
underwriter defendants motion to dismiss, and plaintiffs have elected not to appeal, disposing of
the matter.
* * *
IndyMac Pass-Through Certificates Litigation
GS&Co. is among numerous underwriters named as defendants in a putative securities class action
filed on May 14, 2009 in the U.S. District Court for the Southern District of New York. As to the
underwriters, plaintiffs allege that the offering documents in connection with various
securitizations of mortgage-related assets violated the disclosure requirements of the federal
securities laws. The defendants include IndyMac-related entities formed in connection with the
securitizations, the underwriters of the offerings, certain ratings agencies which evaluated the
credit quality of the securities, and certain former officers and directors of IndyMac affiliates.
On November 2, 2009, the underwriters moved to dismiss the complaint. The motion was granted in
part on February 17, 2010 to the extent of dismissing claims based on offerings in which no
plaintiff purchased, and the court reserved judgment as to the other aspects of the motion.
* * *
Credit Derivatives
-44-
Group Inc. and certain of its affiliates have received inquiries from various
governmental agencies and self-regulatory organizations regarding credit derivative
instruments. The firm is cooperating with the requests.
131. Incredibly, as is painfully apparent from the above paragraph, Defendants saw fit to
disclose no less than twenty areas of legal proceedings (or potential legal proceedings) the
Company was subject to, which spanned approximately ten pages in the Companys most recent Annual
Report, yet they failed to even mention that the Company had become the subject of an SEC
investigation and had received a Wells Notice in July 2009.
132. Notably, Defendants critical omission came at the same approximate time that the
Company became subject to intense public scrutiny (and shareholder outrage) relating to its
planned 2009 executive compensation. See, e.g., Colin Barr, Goldman Sachs: Your tax dollars, their
big bonuses, CNN Money (October 16, 2009); Graham Bowley, Bonuses Put Goldman in Public
Relations Bind, New York Times (October 15, 2009); Evan Weinberger and Brendan Pierson,
Pension Fund Slaps Goldman Sachs Over Bonuses, Law360, December 14, 2009 (discussing the [o]utcry
from Goldmans shareholders over the companys proposed record-setting bonus payments this year).
Under virtually any scenario, but particularly this one, Defendants explanation that they did not
disclose the existence of the Wells Notice before April 2010 because it was immaterial strains
credulity.
133. Accordingly, the above-statements were false and misleading when made because Defendants
knew and failed to disclose that: (1) they were not actually looking out for all of their clients
best interests; and (2) the Company had become the subject of an SEC investigation and had
received a Wells Notice in July 2009.
The Truth Begins to Emerge
134. On December 23, 2009, the New York Times published an article entitled Banks
-45-
Bundled Bad Debt, Bet Against It and Won, which specifically outed the bets against
Goldmans own clients and Defendants breaches of fiduciary duties, and particularly in
connection with the ABACUS deals. The Times article stated, in pertinent part:
Pension funds and insurance companies lost billions of dollars on securities that they
believed were solid investments, according to former Goldman employees with direct
knowledge of the deals who asked not to be identified because they have confidentiality
agreements with the firm.
Goldman was not the only firm that peddled these complex securities known as
synthetic collateralized debt obligations, or C.D.O.s and then made financial bets
against them, called selling short in Wall Street parlance. Others that created similar
securities and then bet they would fail, according to Wall Street traders, include
Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an
investment company whose parent firm was overseen by Lewis A. Sachs, who this year
became a special counselor to Treasury Secretary Timothy F. Geithner.
How these disastrously performing securities were devised is now the subject of scrutiny
by investigators in Congress, at the Securities and Exchange Commission and at the
Financial Industry Regulatory Authority, Wall Streets self-regulatory organization,
according to people briefed on the investigations. Those involved with the inquiries
declined to comment.
While the investigations are in the early phases, authorities appear to be looking at
whether securities laws or rules of fair dealing were violated by firms that created
and sold these mortgage-linked debt instruments and then bet against the clients who
purchased them, people briefed on the matter say.
One focus of the inquiry is whether the firms creating the securities purposely helped
to select especially risky mortgage-linked assets that would be most likely to crater,
setting their clients up to lose billions of dollars if the housing market imploded.
Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they
soured within months of being created.
Goldman and other Wall Street firms maintain there is nothing improper about synthetic
C.D.O.s, saying that they typically employ many trading techniques to hedge
investments and protect against losses. They add that many prudent investors often do
the same. Goldman used these securities initially to offset any potential losses
stemming from its positive bets on mortgage securities.
But Goldman and other firms eventually used the C.D.O.s to place unusually large
negative bets that were not mainly for hedging purposes, and investors and industry
experts say that put the firms at odds with their own clients interests.
The simultaneous selling of securities to customers and shorting them because they
believed they were going to default is the most cynical use of credit information that
I have ever seen, said Sylvain R. Raynes, an expert in
-46-
structured finance at R & R Consulting in New York. When you buy protection against an event that
you have a hand in causing, you are buying fire insurance on someone elses house and then
committing arson.
* * *
Goldman Saw It Coming
Before the financial crisis, many investors large American and European banks, pension funds,
insurance companies and even some hedge funds failed to recognize that overextended borrowers
would default on their mortgages, and they kept increasing their investments in mortgage-related
securities. As the mortgage market collapsed, they suffered steep losses.
A handful of investors and Wall Street traders, however, anticipated the crisis. In 2006, Wall
Street had introduced a new index, called the ABX, that became a way to invest in the direction of
mortgage securities. The index allowed traders to bet on or against pools of mortgages with
different risk characteristics, just as stock indexes enable traders to bet on whether the overall
stock market, or technology stocks or bank stocks, will go up or down.
Goldman, among others on Wall Street, has said since the collapse that it made big money by using
the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives
decided in December 2006 to change the firms overall stance on the mortgage market, from positive
to negative, though it did not disclose that publicly.
Even before then, however, pockets of the investment bank had also started using C.D.O.s to place
bets against mortgage securities, in some cases to hedge the firms mortgage investments, as
protection against a fall in housing prices and an increase in defaults.
Mr. Egol was a prime mover behind these securities. Beginning in 2004, with housing prices soaring
and the mortgage mania in full swing, Mr. Egol began creating the deals known as Abacus. From 2004
to 2008, Goldman issued 25 Abacus deals, according to Bloomberg, with a total value of $10.9
billion.
Abacus allowed investors to bet for or against the mortgage securities that were linked to the
deal. The C.D.O.s didnt contain actual mortgages. Instead, they consisted of credit-default
swaps, a type of insurance that pays out when a borrower defaults. These swaps made it much easier
to place large bets on mortgage failures.
Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of these
wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity.
On occasion, he allowed some hedge funds to take some of the short trades.
Mr. Egol and Fabrice Tourre, a French trader at Goldman, were aggressive from the start in trying
to make the assets in Abacus deals look better than they were, according to notes taken by a Wall
Street investor during a phone call with Mr. Tourre and another Goldman employee in May 2005.
-47-
On the call, the two traders noted that they were trying to persuade analysts at
Moodys Investors Service, a credit rating agency, to assign a higher rating to one
part of an Abacus C.D.O. but were having trouble, according to the investors notes,
which were provided by a colleague who asked for anonymity because he was not
authorized to release them. Goldman declined to discuss the selection of the assets in
the C.D.O.s, but a spokesman said investors could have rejected the C.D.O. if they did
not like the assets.
Goldmans bets against the performances of the Abacus C.D.O.s were not worth much in
2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market
collapsed. The trades gave Mr. Egol a higher profile at the bank, and he was among a
group promoted to managing director on Oct. 24, 2007.
Egol and Fabrice were way ahead of their time, said one of the former Goldman
workers. They saw the writing on the wall in this market as early as 2005. By
creating the Abacus C.D.O.s, they helped protect Goldman against losses that others
would suffer.
135. In response to the New York Times December 23, 2009 article, Defendants caused the
Company to issue a press release the very next day (December 24, 2009) entitled Goldman Sachs
Responds to The New York Times on Synthetic Collateralized Debt Obligations. Notably, the Board
conducted no internal investigation into the matters raised by the December 23, 2009 New York Times
article (nor caused such an internal investigation to take place) before or after issuing this
blanket denial of wrongdoing.
136. Perhaps worse still (particularly in light of the fact that the New York Times had now
revealed that multiple governmental and regulatory investigations, including one by the
SEC, had begun), in addition to denying any misconduct at Goldman, the Board chose to
continue to conceal that the Company had received a Wells Notice months earlier, or that
the SEC was investigating misconduct at Goldman. Defendants press release stated, in
relevant part:
Many of the synthetic CDOs arranged were the result of demand from investing clients
seeking long exposure.
Synthetic CDOs were popular with many investors prior to the financial crisis because
they gave investors the ability to work with banks to design tailored securities which
met their particular criteria, whether it be ratings, leverage or other aspects of the
transaction.
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The buyers of synthetic mortgage CDOs were large, sophisticated investors. These
investors had significant in-house research staff to analyze portfolios and structures
and to suggest modifications. They did not rely upon the issuing banks in making their
investment decisions.
137. Several months later, on or about April 7, 2010, in a letter to Goldman shareholders
published as part of the Companys Annual Report on Form 10-K, defendants Blankfein and Cohn again
denied any wrongdoing. Specifically, Blankfein and Cohn stated: Although Goldman Sachs held
various positions in residential mortgage-related products in 2007, our short positions were not a
bet against our clients.
138. This was a lie. As the New York Times would later report in an article entitled
Goldman Cited Serious Profits On Mortgages published on April 24, 2010, certain of the
defendants and other top Goldman insiders, including Blankfein, Cohn, and Viniar,
traded e-mail messages in 2007 saying that they would make some serious money betting
against the housing markets. These emails, as noted by the New York Times, contradict
statements by Goldman that left the impression that the firm lost money on mortgage-related
investments. Specifically, the New York Times reported:
In late 2007, as the mortgage crisis gained momentum and many banks were suffering
losses, Goldman Sachs executives traded e-mail messages saying that they would make
some serious money betting against the housing markets.
The messages, released Saturday by the Senate Permanent Subcommittee on
Investigations, appear to contradict statements by Goldman that left the impression
that the firm lost money on mortgage-related investments.
In the messages, Lloyd C. Blankfein, the banks chief executive, acknowledged in
November 2007 that the firm had lost money initially. But it later recovered by
making negative bets, known as short positions, to profit as housing prices
plummeted. Of course we didnt dodge the mortgage mess, he wrote. We lost money,
then made more than we lost because of shorts. He added, Its not over, so who
knows how it will turn out ultimately.
In another message, dated July 25, 2007, David A. Viniar, Goldmans chief financial
officer, reacted to figures that said the company had made a $51 million profit from
bets that housing securities would drop in value. Tells you what might be happening
to people who dont have the big short, he wrote to Gary D. Cohn, now Goldmans
president.
-49-
* * *
Goldman on Saturday denied it made a significant profit on mortgage-related products in 2007
and 2008. It said the subcommittee had cherry-picked e-mail messages from the nearly 20 million
pages of documents it provided. This sets up a showdown between the Senate subcommittee and
Goldman, which has aggressively defended itself since the Securities and Exchange Commission filed
a security fraud complaint against it nine days ago. On Tuesday, seven current and former Goldman
employees, including Mr. Blankfein, are expected to testify at a Congressional hearing.
Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations, said
that the e-mail messages contrasted with Goldmans public statements about its trading results.
The 2009 Goldman Sachs annual report stated that the firm did not generate enormous net revenues
by betting against residential related products, Senator Levin said in a statement Saturday.
These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage
market.
The messages appear to connect some of the dots at a crucial moment of Goldman history. They show
that in 2007, as most other banks hemorrhaged money from plummeting mortgage holdings, Goldman
prospered.
At first, Goldman openly discussed its prescience in calling the housing downfall. In the third
quarter of 2007, the investment bank reported publicly that it had made big profits on its
negative bet on mortgages.
But by the end of 2007, the firm curtailed disclosures about its mortgage trading results. Its
chief financial officer told analysts that they should not expect Goldman to reveal whether it was
long or short on the housing market. By late 2008, Goldman was emphasizing its losses, rather than
its profits, pointing regularly to write-downs of $1.7 billion on mortgage assets in 2008 and not
disclosing the amount it made on its negative bets.
Goldman and other firms often take positions on both sides of an investment. Some are long, which
are bets that the investment will do well, and some are shorts, which are bets the investment will
do poorly.
Goldman has said it added shorts to balance its mortgage book, not to make a directional bet on a
market collapse. But the messages released by the subcommittee Saturday appear to show that in
2007, at least, Goldmans short bets were eclipsing the losses on its long positions.
In May 2007, for instance, Goldman workers e-mailed one another about losses on a bundle of
mortgages issued by Long Beach Mortgage Securities. Though the firm lost money on those, a worker
wrote, there was good news: we own 10 mm in protection. That meant Goldman had enough of a bet
against the bond that, over all, it profited by $5 million.
On Oct. 11, 2007, one Goldman manager in the trading unit wrote to another, Sounds like we will
make some serious money, and received the response, Yes we are well positioned.
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Documents released by the Senate subcommittee appear to indicate that in July 2007,
Goldmans accounting showed losses of $322 million on positive mortgage positions, but
its negative bet what Mr. Viniar called the big short brought in $373 million.
As recently as a week ago, a Goldman spokesman emphasized that the firm had tried only
to hedge its mortgage holdings in 2007.
The firm said in its annual report this month that it did not know back then where
housing was headed, a sentiment expressed by Mr. Blankfein the last time he appeared
before Congress.
We did not know at any minute what would happen next, even though there was a lot of
writing, he told the Financial Crisis Inquiry Commission in January.
It is not known how much money in total Goldman made on its negative housing bets.
Neither Goldman nor the panel issued information about Goldmans mortgage earnings in
2009
In its response Saturday, Goldman Sachs released an assortment of internal e-mail
messages. They showed workers disagreeing at some junctures over the direction of the
mortgage market. In 2008, Goldman was stung by some losses on higher-quality mortgage
bonds it held, when the crisis expanded from losses on risky bonds with subprime loans
to losses in mortgages that were given to people with better credit histories.
Still, in late 2006, there are messages that show Goldman executives discussing ways to
get rid of the firms positive mortgage positions by selling them to clients. In one
message, Goldmans chief financial officer, Mr. Viniar, wrote, Lets be aggressive
distributing things.
Goldman also released detailed financial statements for its mortgage trading unit. Those
statements showed that a group of traders in what was known as the structured products
group made a profit of $3.69 billion as of Oct. 26, 2007, which more than covered losses
in other parts of Goldmans mortgage unit. Several traders from that group will testify on
Tuesday.
The messages released by Goldman included many written by Fabrice Tourre, the executive
who is the only Goldman employee named in the S.E.C. complaint. They reveal his
skepticism about the direction of the subprime mortgage market in 2007. In a March 7
message to his girlfriend, he wrote, According to Sparks, that business is totally
dead, and the poor little subprime borrowers will not last so long. He was referring to
Dan Sparks, then the head of Goldmans mortgage trading unit.
* * *
139. A little over a week after defendants specifically denied that Goldman personnel had
placed bets against the Companys clients, on April 16, 2010, the SEC Action was filed against
Goldman and defendant Tourre. The SEC Action charged Goldman and Tourre with
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defrauding investors by misstating and omitting key facts about the products described herein.
140. Later that day, in a hastily-assembled press release, Defendants (including the
Board) once again, as usual, flatly denied the SECs allegations or any allegations of
wrongdoing at Goldman. Specifically, Defendants defiantly claimed that [t]he SECs
charges are completely unfounded in law and fact and we will vigorously contest them and
defend the firm and its reputation. Further, Defendants arrogantly added that [they]
are disappointed that the SEC would bring this action. Defendants stated, in part:
We want to emphasize the following four critical points which were missing from the
SECs complaint.
| Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money. | ||
| Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side. | ||
| ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities. | ||
| Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SECs complaint accuses the firm of fraud because it didnt disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor. |
141. Immediately following the filing of the SEC Action, the price of the Companys stock
fell 13% from $184.27 per share to close at $160.70 per share on April 16, 2010. This represented
a one-day market capitalization loss of over $10 billion.
142. The news for Goldman and its stockholders has only continued to worsen in the
-52-
wake of the filing of the SEC Action as the financial press got a hold of the story and
investigated further. Despite Defendants blanket denials, the financial press has not been kind.
143. For instance, in a April 17, 2010 article entitled For Goldman, a Bets Stakes Keep
Growing the New York Times reported that, according to former Goldman employees, [a]s the
housing market began to fracture in 2007, senior Goldman executives began overseeing the mortgage
department closely...[and] routinely visited the unit. Among them were David A. Viniar, the chief
financial officer; Gary D. Cohn, then the co-president; and Pablo Salame, a sales and trading
executive, these former employees said. Even Goldmans chief executive, Lloyd C. Blankfein, got
involved. The New York Times also noted in this article that [r]ecent public statements made by
Mr. Blankfein seem to conflict with the S.E.C. account. Specifically, the New York Times
reported:
For Goldman Sachs, it was a relatively small transaction. But for the bank and the
rest of Wall Street the stakes couldnt be higher.
Accusations that Goldman defrauded customers who bought investments tied to risky
subprime mortgages have only just begun to reverberate through the financial world.
The civil lawsuit that the Securities and Exchange Commission filed against Goldman on
Friday seemed to confirm many Americans worst suspicions about Wall Street: that the
game is rigged, the odds stacked in the banksfavor.
It is the first big case but probably not the last, legal experts said to delve
into a Wall Street firms role in the mortgage fiasco.
* * *
The S.E.C. s action could also hit Wall Street where it really hurts: the wallet.
It could prompt dozens of investor claims against Goldman and other Wall Street titans
that devised and sold toxic mortgage investments.
On Saturday, several European banks that lost money in the deal said they were
reviewing the matter. They could try to recoup the money from Goldman.
And it raises new questions about Goldman, the bank at the center of more concentric
circles of economic and political power than any other on Wall Street. Goldman whose
controversial success has leapt from the financial pages to the cover of Rolling Stone
has fiercely defended its actions before, during and after the financial crisis. On
Friday, it called the S.E.C.s accusations unfounded.
-53-
* * *
The public outcry against the bank bailouts was driven in part by suspicions that a
heads-we-win, tails-you-lose ethos pervades the financial industry. To many, that Goldman and
others are once again minting money and paying big bonuses to their employees is evidence
that Wall Street got a sweet deal at taxpayers expense. The accusations against Goldman may only
further those suspicions.
The S.E.C. suit against Goldman, if proven true, will confirm to people their suspicions about
the total selfishness of these financial institutions, said Steve Fraser, a Wall Street historian
and author of Wall Street: Americas Dream Palace. Theres nothing more damaging than that.
This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish
exploiting.
On Friday, Goldmans stock took a beating, falling 13 percent and wiping out more than $10 billion
of the companys market value. It was a possible sign that investors fear that the S.E.C.
complaint will damage Goldmans reputation and its ability to keep its hands on so many sides of a
trade a practice that is immensely profitable for the firm.
* * *
As the housing market began to fracture in 2007, senior Goldman executives began overseeing the
mortgage department closely, said four former Goldman Sachs employees, who spoke on the condition
they not be identified because of the sensitivity of the matter.
Senior executives routinely visited the unit. Among them were David A. Viniar, the chief financial
officer; Gary D. Cohn, then the co-president; and Pablo Salame, a sales and trading executive,
these former employees said. Even Goldmans chief executive, Lloyd C. Blankfein, got involved.
Top executives met routinely with Dan Sparks, the head of the mortgage trading unit, who retired
in spring 2008. Managers instructed several traders to sell housing-related investments. Indeed,
they urged Mr. Tourre and a colleague, Jonathan Egol, to place more bets against mortgage
investments, the former employees said.
A Goldman spokesman said Saturday that the top executives were not involved in the approval
process for Abacus, the deal cited by the S.E.C., and that their involvement with the mortgage
department in 2007 was related to their desire to counterbalance the positive bets on housing the
banks had already made.
Mr. Blankfein has already been questioned by a Congressional commission about the toxic vehicles
Goldman devised and sold, even as the bank realized the housing market was in trouble.
Recent public statements made by Mr. Blankfein seem to conflict with the S.E.C. account.
In testimony in January before the Financial Crisis Inquiry Commission, the panel appointed by
Congress to examine the causes of the crisis, for example, he
-54-
described Goldmans approach to dealing with its clients: Of course, we have an
obligation to fully disclose what an instrument is and to be honest in our dealings,
but we are not managing somebody elses money.
But the S.E.C. complaint says Goldman misled investors who bought one of the banks
Abacus deals. The bank failed to tell them the mortgage bonds underpinning the
investment had been selected by a hedge fund manager who wanted to bet against the
investment, the S.E.C. says. Those bonds were especially vulnerable, the commission
says.
144. The New York Times further confirmed the involvement of top Goldman insiders,
including Blankfein, in an April 18, 2010 article entitled Senior Executives at Goldman Had
a Role in Mortgage Unit. The article specifically states that executives up to and
including Lloyd C. Blankfein, the chairman and chief executive, took an active role in
overseeing the mortgage unit as the tremors in the housing market began to reverberate
through the nations economy. This article additionally stated as follows:
Mortgage specialists like those at Goldman were, in a sense, the mad scientists of the
subprime era. They devised investments by bundling together bonds backed by home loans,
a process that enabled mortgage lenders to make even more loans.
While this sort of financing helped make loans available, the most exotic creations
also spread the growing risks inside the American housing market throughout the
financial world. When the boom went bust, the results were disastrous.
By early 2007, Goldmans mortgage unit had become a hive of intense activity. By then,
the business had captured the attention of senior management. In addition to Mr.
Blankfein, Gary D. Cohn, Goldmans president, and David A. Viniar, the chief financial
officer, visited the mortgage unit frequently, often for hours at a time.
Such high-level involvement was unusual elsewhere on Wall Street, where many executives
spent little time learning the workings of their mortgage businesses or how those
businesses might endanger their companies.
The decision to get rid of positive bets on mortgages turned out to be prescient.
Unlike most other Wall Street banks, Goldman profited from its mortgage business as the
housing bubble was inflating and then again when the bubble burst.
145. In a further attempt to flatly deny any wrongdoing, on April 19, 2010, Defendants caused
the Company to yet again issue a response to the SEC Action. In their April 19, 2010 press
release, Defendants again issued strong denials of any wrongdoing and revealed that the
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SEC investigation had been ongoing for the past year and a half:
On Friday, April 16, the US Securities and Exchange Commission brought a civil action against
Goldman Sachs in relation to a single transaction in 2007 involving two professional
institutional investors, IKB and ACA Capital Management (ACA). We believe the SECs
allegations to be completely unfounded both in law and fact, and will vigorously contest this
action.
The core of the SECs case is based on the view that one of our employees misled these two
professional investors by failing to disclose the role of another market participant in the
transaction, namely Paulson & Co., and that the employee thereby orchestrated the creation of
materially defective offering materials for which the firm bears responsibility.
Goldman Sachs would never condone one of its employees misleading anyone, certainly not
investors, counterparties or clients. We take our responsibilities as a financial
intermediary very seriously and believe that integrity is at the heart of everything that we
do.
Were there ever to emerge credible evidence that such behavior indeed occurred here, we would
be the first to condemn it and to take all appropriate actions.
This particular transaction has been the subject of SEC examination and review for over
eighteen months. Based on all that we have learned, we believe that the firms actions were
entirely appropriate, and will take all steps necessary to defend the firm and its reputation
by making the true facts known.
The SEC does not contend that the two professional institutional investors involved did not
know what they were buying, or that the securities included in this privately placed
transaction were in any way improper. These institutions were very experienced in the CDO
market.
In this private transaction, Goldman Sachs essentially acted as an intermediary, helping to
facilitate the investing objectives of two clients. Extensive disclosures as to each of the
securities in the reference portfolio, similar to those required by the SEC in public
transactions, were contained in the offering documents which provided all the information
needed to understand and evaluate the portfolio.
In the process of selecting the reference portfolio, ACA Capital Management, who was both the
portfolio selection agent and the overwhelmingly largest investor in the transaction ($951
million, with the other professional investors exposure being $150 million), evaluated every
security in the reference portfolio using its own proprietary models and methods of analysis.
ACA rejected numerous securities suggested by Paulson & Co., including more than half of its
initial suggestions, and was paid a fee for its role as portfolio selection agent in
analyzing and approving the underlying reference portfolio.
In summary, the SECs complaint is an issue of disclosure on a single transaction involving
professional investors in a market in which they had extensive experience. Critical points
missing from the SECs complaint include:
-56-
Goldman Sachs Lost Money on the Transaction. The firm lost more than $90 million arising from this
transaction. Our fee was $15 million. We certainly did not wish to structure an investment that was
designed to lose money.
Objective Disclosure Was Provided. The transaction at issue involved a static portfolio of
securities, and was marketed solely to sophisticated financial institutions. IKB, a large German
Bank and leading CDO market participant and ACA Capital Management, the two investors, were
provided extensive information about those securities and knew the associated risks. Among the
most sophisticated mortgage investors in the world, they understood that a synthetic CDO
transaction requires a short interest for every corresponding long position.
Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SECs
complaint in part accuses the firm of potential fraud because it didnt disclose to one party of
the transaction the identity of the party on the other side. As normal business practice, market
makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never
represented to ACA that Paulson was to be a long investor.
ACA, the Largest Investor, Selected and Approved the Portfolio. The
portfolio of mortgage backed securities was selected by an independent and experienced portfolio
selection agent after a series of discussions, including with IKB and Paulson & Co. ACA had an
obligation and, as by far the largest investor, every incentive to select appropriate securities.
In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing
prices. The firm structured a synthetic CDO through which Paulson could benefit from a decline in
the value of the underlying reference securities. Those on the other side of the transaction, IKB
and ACA Capital Management, the portfolio selection agent, could benefit from an increase in the
value of the securities. ACA had a long established track record as a CDO manager. As of May 31,
2007, ACA was managing 26 outstanding CDOs with underlying portfolios consisting of $17.5 billion
of assets.
IKB, ACA and Paulson all provided their input regarding the composition of the underlying
securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage
Backed Securities (RMBS), which it stood behind as the portfolio selection agent and the largest
investor in the transaction. The offering documents for the transaction included every underlying
reference mortgage security.
The offering documents for each of these RMBS in turn disclosed detailed information concerning the
mortgages held by the trust that issued the RMBS. Any investor losses resulted from the massive
decline of the broader subprime mortgage market, not because of which particular securities ended
up in the reference portfolio or how they were selected.
The transaction was not created as a way for Goldman Sachs to short the subprime market. To the
contrary, Goldman Sachs retained a substantial long position in the transaction and lost money as
a result.
Questions and Answers
Who were the investors in this transaction?
-57-
The investors in the transaction were ACA Capital Management, a well-recognized
collateral manager and investor in CDOs, and IKB, then believed to be one of the most
highly-sophisticated CDO investors in the world.
What is a synthetic CDO?
A synthetic CDO has characteristics much like that of a futures contract, requiring two
counterparties to take different views on the forward direction of a market or
particular financial product, one short and one long. A CDO is a debt security
collateralized by debt obligations, including mortgage-backed securities in many
instances. These securities are packaged and held by a special purpose vehicle (SPV),
which issues notes that entitle their holders to payments derived from the underlying
assets. In a synthetic CDO, the SPV does not own the portfolio of actual fixed income
assets that govern the investors rights to payment, but rather enters into CDSs that
reference the performance of a portfolio. The SPV does hold some separate collateral
securities which it uses to meet its payment obligations.
What are the implications of this SEC action for the overall CDO market?
The SEC complaint is related to a single transaction in 2007 and involves a highly
particularized set of alleged facts. It would not appear to have broad ramifications
for the CDO market generally.
Who selected the securities that ended up in this particular portfolio?
ACA had the sole right and responsibility to select the portfolio and it in fact did
so. As part of the process, ACA received input from other transaction participants. ACA
had served as portfolio selection agent or collateral manager for numerous other
transactions, and no doubt was accustomed to an interactive selection process. ACA used
its own expertise and models in scrutinizing and approving the referenced securities.
ACA subjected the securities proposed for inclusion in the portfolio to its own
proprietary models and analysis.
What is the firms role in facilitating such transactions?
Goldman Sachs acts as a market intermediary through which its clients can take long or
short positions on the reference securities. Goldman Sachs will often assume the
opposite side of a clients position to complete a transaction. As fully disclosed to
investors in the offering materials in this transaction, the firm can then hold or sell
that position to increase, reduce or eliminate its own exposures.
Did investors have adequate disclosure?
Extensive, objective disclosures were contained in the offering documents. Investors had
all the information they needed to understand and evaluate the reference securities.
What was the role of ABN Amro/RBS in this transaction?
ABN intermediated a $909 million credit default swap referencing the portfolio between
Goldman Sachs and ACA. ABN assumed the credit risk that ACA might not be able to pay if
its obligations under the credit default swap came due. When the portfolio suffered
writedowns, ACA ultimately was not able to pay the amount due on the credit default
swap, and ABN made payment.
146. Notwithstanding Defendants claims that no wrongdoing ever occurred, the Board has
specifically come under fire (and rightfully so) for its failure to investigate and properly
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inform itself in the face of such serious allegations. For instance, in an April 19, 2010
article published by Bloomberg entitled Goldman Sachs Stock, Board Under Pressure Amid Probe,
James Post, a professor of corporate governance and ethics at Boston University, took the Board to
task for its apparent inaction and failure to investigate, and noted that defendants strong and
swift public denials of any wrongdoing have compromised the Boards ability to investigate or take
any meaningful action. Moreover, this article also indicated that the total costs to Goldman in
connection with the SEC Action could amount to $2 billion. The Bloomberg article, in pertinent
part, states:
April 19 (Bloomberg) Goldman Sachs Group Inc.s stock price may fall and the board
could come under pressure to change managers after European politicians followed a U.S.
fraud suit with plans to scrutinize the firm, investors said.
Prime Minister Gordon Brown called yesterday for the U.K. Financial Services Authority
to start a probe, saying he was shocked at the moral bankruptcy indicated in the
Securities and Exchange Commission suit against Goldman Sachs. Germanys financial
regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor
Angela Merkel said.
The escalating rhetoric adds urgency to efforts by Chairman and Chief Executive Officer
Lloyd Blankfein and the rest of his board to stem negative publicity. Although Goldman
Sachs vowed to fight the SEC case, calling it unfounded in law and fact, the stock
plunged 13 percent on April 16. The shares rose 1.6 percent to $163.32 at 4:50 p.m. in
New York Stock Exchange composite trading.
The lynch-mob mentality that is prevailing right now against Goldman is such that you
dont know where this thing could go, so I think the stock is going to be under
continuing pressure, said Michael Holland, who oversees more than $4 billion as
chairman of New York-based Holland & Co. The board actually has to pay attention not
only to the legal niceties of this thing but also to the franchise viability as well.
Michael Fair, president and founder of Washington-based Farr, Miller & Washington LLC,
said he sold his Goldman Sachs stock on April 16 because the SEC suit brought the
controversy over Wall Streets dealings in collateralized debt obligations and
credit-default swaps to a new level.
Investors Understand Fraud
Investors understand that something complicated and errant happened with CDOs and CDSs
but theyre not sure entirely what, because these collateralized debt obligations and
credit- default swaps are complicated and somewhat arcane, said Farr, whose firm
manages more than $700 million in assets. But investors understand fraud. They get
fraud really clearly.
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Samuel Robinson, a spokesman for Goldman Sachs, declined to comment.
The SEC said that in early 2007, as the U.S. housing market teetered, Goldman Sachs created and
sold a CDO linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped
pick the underlying securities and bet against the vehicle, known as Abacus 2007-AC1.
Goldman Sachs, whose $13.4 billion profit last year was the highest ever for a Wall Street
securities firm, is facing an unprecedented level of public opprobrium because of the perception
that it profited from practices that led to the biggest financial crisis since the Great
Depression.
The Bogey Man
Goldman Sachs will now become the bogey man for all financial ills, and I think its a story
thats not going away, it is only likely to increase, said Matt McCormick, an analyst at Bahl &
Gaynor Inc. in Cincinnati, which manages about $2.8 billion. If you buy it at these levels you
are hoping that this is the worst of the bad news, and I dont believe thats the case.
Steve Stelmach, an analyst at FBR Capital Markets in Arlington, Virginia, today removed Goldman
from his Top Picks list, citing the SEC suit. He still reiterated his outperform rating because
of the banks strong fundamentals.
The market appears to be overly discounting the potential earnings impact from the SEC charges,
he wrote in a note to clients today. The stocks drop implies the suit may cost the bank $2
billion before tax, twice the $1 billion the SEC says investors lost in the transaction, he wrote.
Answer Questions
Of the 29 analysts that track Goldman Sachs, 22 rate the stock a buy, seven mark it a hold and
none recommend investors sell, data compiled by Bloomberg show.
Politicians that were forced to bail out their nations banks are turning on Goldman Sachs. The
firm, which paid its employees $16.2 billion last year, has become a target for politicians like
the U.K.s Brown who are running in elections or who, in the U.S., are battling over new financial
regulation.
It is individuals in Goldman Sachs that are going to have to answer questions, Brown said at an
event in London today. We are determined to root out any malpractice.
The European Union is probing Goldman Sachss role in arranging swaps for Greece that may have
masked the countrys budget deficit. Congress has also examined the companys relationship with
American International Group Inc., which got a $182.3 billion U.S. rescue.
Federal Case Assigned
The SEC case against Goldman Sachs was assigned to U.S. District Judge Barbara Jones in New York
who presided over the case of former WorldCom Inc.
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CEO Bernard Ebbers. Ebbers, who was convicted in 2005 of overseeing one of the biggest
frauds in U.S. history, is serving a 25-year prison term.
Goldman Sachss first-quarter profit, due to be published tomorrow, probably wont help
even though analysts expect earnings to rise 41 percent from a year earlier, McCormick
said.
Theyre going to probably come out with great earnings, at least thats the
expectation, but that is going to be quickly discounted and drowned out, he said.
Goldman Sachss board of directors should conduct its own investigation to ensure that
it understands what senior management knew about the issues raised by the SECs
complaint, said James Post, a professor of corporate governance and ethics at the
Boston University School of Management.
How Long?
The board has got to be insisting on a much deeper level of internal investigation
that reports only to them, not to Blankfein, Post said. Theyve got to be asking the
question how long can we continue going with Blankfein before weve got to clean house
and put a new group of people in there?
William W. George, a Harvard Business School professor who has served on Goldman
Sachss board since 2002, referred a request for an interview to the companys press
office. His Twitter account, which lauded JPMorgan Chase & Co. CEO Jamie Dimon for his
firms better-than-expected earnings on April 14, remained silent on the controversy
surrounding Goldman Sachs.
Boston Universitys Post said he wouldnt expect the board to take any immediate action
to change the firms management because it would seem to contradict the defiant
position the company took on April 16.
Im pretty sure that the board at Goldman is having a bad weekend, Post said
yesterday. They may be praying for some news out of the Vatican or a new volcano to
get them off the front pages.
Management Changes?
Bahl & Gaynors McCormick said changing senior management could add fuel to critics
complaints instead of mollifying them. A better course, he said, would be to bring in a
well- respected Wall Street veteran, even someone like billionaire Warren Buffett, to
serve as a chairman or adviser to Blankfein. Buffetts Berkshire Hathaway Inc. is
already one of the largest investors in Goldman Sachs.
I could see them bringing in an outside person, somebody who is viewed by the Street as
a wise sage that could come in and give an outsiders perspective to advise Blankfein,
McCormick said. Nobodys going to believe Goldman is going to take care of this on
their own.
147. Defendants blanket denials and cover-up of the Wells Notice have effectively
compromised the Boards ability to investigate these events, and remedy them. The Board has
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consistently either issued or sanctioned other Defendants denials of wrongdoing. Accordingly, at
this point, the Board cannot effectively investigate or prosecute any claims related to this chain
of events because, by doing so, it runs the substantial risk of reaching conclusions that would
contradict prior statements issued, which could further expose Goldman.
148. The timing of events here is critical Goldman and its stockholders needed a Board that
would quickly and effectively respond to Company concerns. Instead, the Board became parties to the
cover-up by allowing other Defendants to issue blanket denials on the Companys behalf before it
had conducted any meaningful inquiry to ascertain the veracity of those statements. Clearly, the
Board should have taken decisive action when it first became aware of the SECs inquiry (certainly,
the Board had the opportunity to), but because it failed to do so, its ability to effectively act
now has been eviscerated
149. Also on April 19, 2010, Reuters published an article entitled Goldman May Face Backlash
For Staying Mum On Probe, which strongly criticized the facts that not only did Defendants learn
of the likelihood of charges in July 2009 with the receipt of a Wells Notice, but that Defendants
blanket denials and silence may further hurt the Company. The article, in relevant part, stated:
NEW YORK, April 19 (Reuters) Freshly branded a vampire squid, Goldman Sachs Group
Inc (GS.N) last summer contended with a backlash over its ballooning bonus pool and a
controversy over the special sauce that made its high-frequency trading operation go.
At the same time, another concern quietly lurked in the background.
In August, the U.S. Securities and Exchange Commission notified Goldman through an
official Wells Notice that it was facing civil liability in the Abacus collateralized
debt obligation case. Goldman did not disclose its SEC quandary to investors until
charges were filed against the company on Friday.
SEC rules mandate that companies must report material events to shareholders within 10
days.
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Wells Notices often are disclosed because companies want to avoid to shareholder lawsuits. When the
news of the charges against Goldman broke on Friday, shares tumbled more than 12 percent.
We disclose legal and regulatory matters as required, Goldman spokesman Samuel Robinson said.
There is no obligation to disclose receipt of a Wells Notice, which can have many potential
outcomes or none.
But some investors, not surprisingly, are angry and looking to sue Goldman, said Jacob Zamansky, a
plaintiffs lawyer, who said hes been contacted by a number of clients about potential suits
against the dominant Wall Street bank.
Zamansky called the failure to disclose the Wells Notice highly significant.
It should have been disclosed and most firms on the Street do, in fact, disclose these, Zamansky
said. Look at the effect this has had. A case by the SEC is clearly material to their business.
Im sure this isnt the only deal where they have problems.
MATERIAL
On Friday, the SEC charged Goldman with hiding from institutional investors the involvement of a
prominent hedge fund manager in helping it structure a subprime mortgage debt product that he was
betting against.
Goldman vowed to vigorously defend itself against the charges and denied that it had structured a
portfolio that was designed to lose money, claiming that Goldman itself had invested in the equity
portion of the deal.
Ironically, months before the SEC filed its charges, lawyers for Goldman had tried to persuade
regulators that there was no need to disclose the hedge funds involvement because it wasnt
material. That, of course, is much the same argument Goldman is making now about its own
decision not to disclose the Wells Notice.
The SEC, as a general rule, does not tell companies when to disclose the receipt of a Wells
Notice. The decision is left to the company to decide whether it is something investors would want
to know about.
Some companies disclose Wells Notices in regulatory filings shortly after being notified by the
SEC. For instance, Dell Inc (DELL.O), Bank of America Corp (BAC.N) and American International
Group Inc (AIG.N) have all disclosed Wells Notices that they or their employees have received.
Jill Fisch, a professor at the University of Pennsylvania Law School, said theres no bright line
on when companies report Wells Notices.
There isnt a standard approach to this, Fisch said. The real question is how big an impact is
this case likely to have on Goldman. You cant necessarily judge that by the market reaction
because the market reaction may be an overreaction or a perception that this is the tip of the
iceberg.
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In determining whether or not to disclose a Wells Notice, some companies will only do
so if the regulatory action implicates a division thats responsible for either 10
percent of its assets or revenues.
In the case of Goldman, the Abacus CDO deal, at most, put the company on the hook for
paying about $1 billion in damages. In 2009, Goldmans net income was about $12
billion.
A BUSY SUMMER
When Goldman received the Wells Notice, it was already fending off other PR hits.
There was a backlash against its pay practices and the fact that it had already set
aside billions of dollars to pay its employees, soon after taxpayers had committed
hundreds of billions to rescue the industry.
Goldman also faced questions about its transactions with American International Group,
the giant insurer at the heart of the meltdown and how Goldman benefited from AIGs
rescue.
Further, Goldmans high-frequency trading models came under scrutiny as one of its
former employees was charged with stealing its secret computer codes. The saga led to a
new line of questions about whether Goldman had special advantages in its trading
operations.
And, of course, Rolling Stone writer Matt Taibbi famously described the investment bank
as a great vampire squid wrapped around the face of humanity a nickname that has
stuck as a punch line.
Some Goldman investors and clients, already incensed at the SECs allegations, say the
company is likely to be full of excuses when it eventually fields questions from
investors.
Of course, they have an obligation to report material facts, said Michael Vogelzang,
president of investment firm Boston Advisors, which owns shares of Goldman Sachs, But
in a very real way, it is Goldman doing what they do. He added, joking: Im sure they
will have a wonderful answer when investors ask them about it.
150. Defendants failure to disclose the receipt of a Wells Notice was further criticized by
Charles Elson in an April 19, 2010 New York Post article entitled Goldman Bosses Hid Feds Probe.
Specifically, Mr. Elson stated that: "[i]n an age of heightened transparency...receipt of that
[Wells] notice should have been disclosed.4
4 | As stated above, this is particularly the case given the ongoing public controversy regarding the Companys executive compensation. |
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151. In addition to the Companys problems within the U.S., on April 20, 2010, it was revealed
that Britains Financial Services Authority has launched its own probe in the matter.
152. Most recently, on April 24, 2010, as discussed above, the New York Times detailed the
emails between Blankfein, Cohn, Viniar, and other top Goldman contradicting Defendants public
representations. That same day, as discussed below, the Journal published an article revealing the
massive illicit insider sales executed by the Insider Selling Defendants while they, but not the
public, were aware of the Wells Notice.
153. As a result of defendants breaches of fiduciary duty and other misconduct, the price of
the Companys stock still has not recovered and currently trades at around $152 per share.
154. Accordingly, the Company has been damaged.
Massive Illicit Insider Selling After Goldman Received the Wells Notice, But Before It Was
Disclosed By Defendants
Disclosed By Defendants
155. As the Journal would reveal on April 24, 2010, while in possession of non-public,
material, adverse information regarding the Company (specifically, the existence of the Wells
Notice which had been served on Goldman in July 2009), beginning on October 16, 2009 and ending on
February 26, 2010, the Insider Selling Defendants including the Companys co-General Counsel,
defendant Stecher, and a director of the Company, defendant Bryan, collectively sold over 382,000
artificially inflated shares of Goldman stock into the market and collectively reaped over $65.4
million worth of proceeds, as shown in the following chart:
Transaction | ||||||||||||||||
Insider | Dates | Shares | Price | Proceeds | ||||||||||||
Smith |
10/16/09 | 16,129 | $186.57 | $ | 3,009,187 | |||||||||||
Sherwood |
11/13/09-11/24/09 | 182,860 | $ | 171.54-$178.05 | $ | 31,936,166 |
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Transaction | ||||||||||||||||
Insider | Dates | Shares | Price | Proceeds | ||||||||||||
Evans |
11/23/09-11/27/09 | 140,000 | $ | 164.80-$173.47 | $ | 23,768,000 | ||||||||||
Stecher |
2/8/10-2/26/10 | 37,558 | $ | 152.65-156.69 | $ | 5,760,388 | ||||||||||
Bryan |
2/18/10 | 6,000 | $155.37 | $ | 932,220 | |||||||||||
TOTAL |
382,547 | $ | 65,405,961 |
156. As the Journal reported on April 24, 2010 in an article entitled Insiders Sold
Shares As SEC Probed Firm, the Insider Selling Defendants illicit insider sales represented
the most active spate of insider selling [by Goldman insiders] in three years:
Five senior executives of Goldman Sachs Group Inc., including the firms co-general
counsel, sold $65.4 million worth of stock after the firm received notice of possible
fraud charges, which later drove its stock down 13%.
Sales by three of the five Goldman insiders occurred at prices higher than the stocks
current level. The stock sales by co-general counsel Esta Stecher, vice chairmen
Michael Evans and Michael Sherwood, principal accounting officer Sarah Smith and board
member John Bryan occurred between October 2009 and February 2010. It was the most
active spate of insider selling in three years, according to InsiderScore.com
in Princeton, N.J., which tracks and analyzes purchases and sales of stocks by top
executives and directors.
Goldman received notice of the possible charges last July, but didnt publicly disclose
that fact, later explaining that it didnt consider such a notice material information
investors would have needed to value the stock. A week ago, on April 16, the Securities
and Exchange Commission filed civil-fraud charges against Goldman for failing to
disclose that a short seller, Paulson & Co., participated in selection of assets in a
pool tied to subprime mortgages.
The charges drove Goldman stock down from a closing price of $184.27 on April 15 to
$160.70 on April 16. The stock hasnt recovered any of the first-day loss. It closed
out the week at $157.40 in 4 p.m. trading on the New York Stock Exchange.
* * *
Messrs. Bryan and Sherwood and Ms. Stecher sold some or all of their shares after
exercising options to buy at lower prices that would have expired between November 2010
and November 2012.
Ms. Smith sold 16,129 shares on Oct. 16 for $3 million at $186.57 a share, according to
InsiderScore.com.
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Mr. Sherwood sold shares between Nov. 13 and 24 for $31.9 million, or $174.65 a share,
InsiderScore.com said. Mr. Evans sold shares between Nov. 23 and 27 for $23.7
million, or $169.56 a share. Ms. Stecher sold shares on Feb. 8 and 26 for $5.8 million,
or $153.38 a share. And Mr. Bryant sold shares on Feb. 18 for $932,223, or $155.37 a
share.
Mr. Sherwood, co-chief executive of Goldman Sachs International in London and Mr.
Evans, chairman of Goldman Sachs Asia in Hong Kong, are on the Goldman management
committee with Ms. Stecher.
Ben Silverman, director of research at InsiderScore.com, said the insider
selling since October was the most aggressive at Goldman in three years, since late
2006 through early 2007.
157. Predictably, the Board has taken no action whatsoever to investigate and/or
remedy the improper insider sales described above, and reported on in the Journal.
DERIVATIVE AND DEMAND ALLEGATIONS
158. Plaintiff brings this action derivatively in the right and for the benefit of Goldman to
redress the breaches of fiduciary duty and other violations of law by Defendants.
159. Plaintiff will adequately and fairly represent the interests of Goldman and its
shareholders in enforcing and prosecuting its rights.
160. The Board currently consists of the following twelve (12) individuals: defendants
Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal, Schiro, and
Simmons. Plaintiff has not made any demand on the present Board to institute this action because
such a demand would be a futile, wasteful and useless act, for the following reasons:
a. | Defendants Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal, Schiro, and Simmons have clearly demonstrated their unwillingness and/or inability to act in compliance with their fiduciary obligations and/or to sue themselves and/or their fellow directors and allies in the top ranks of the Company for the violations of law complained of herein. Most notably, this is evidenced by the Boards refusal to properly inform itself by investigating the misconduct that has exposed Goldman to liability, in violation of their fiduciary |
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duties to the Company and its shareholders. Indeed, the Board has not investigated or caused to be investigated any of the allegations raised in the July 2009 Wells Notice or the recent SEC Action. Each member of the Board is a fiduciary under Delaware law, and as such they owe the corporation and its stockholders a duty of care to inform themselves properly. Indeed, defendants Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal, Schiro are each duty-bound to inform themselves of all material information reasonably available to them. The Board has failed to do so, as the financial media has specifically highlighted, and under such circumstances Delaware law does not require a stockholder to make a pre-suit demand on a board of directors. Thus, demand is excused. |
b. | The Board has demonstrated its hostility to this Action by failing to disclose the existence of the July 2009 Wells Notice and by participating in or permitting the issuance of Defendants blanket denials of wrongdoing set forth above. Moreover, as described above, Defendants defiant denials of wrongdoing have compromised the Boards ability to investigate or take any action, and similarly have compromised the Boards ability to independently and disinterestedly consider a demand. Thus, demand is excused. | ||
c. | During the Relevant Period, a majority of the Board members, defendants Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal and Schiro served as members of the Audit Committee. Pursuant to the Companys Audit Committee Charter, members of the Audit Committee are responsible for, inter alia, overseeing the integrity of the financial statements of the Company, overseeing its |
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compliance with legal and regulatory requirements, and overseeing the Companys internal controls. Defendants Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal and Schiro breached their fiduciary duties of due care, loyalty, and good faith, because the Audit Committee, inter alia, allowed or permitted the above legal and regulatory violations to occur, as well as failures in the Companys internal controls, and allowed or permitted the above false and misleading statements to be issued, specifically those concealing the existence of the Wells Notice and accompanying SEC Action. Therefore, defendants Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal and Schiro face a substantial likelihood of liability for their breach of fiduciary duties and any demand upon them is futile; |
d. | While in possession of material, adverse, non-public information, i.e. that the Company had been served with a Wells Notice in July 2009, defendant Bryan participated in illegal insider selling by selling 6,000 of his personally held Goldman shares for proceeds of $932,220. Because defendant Bryan received personal financial benefits from challenged insider trading transactions, Bryan is directly interested in a demand, and any demand upon Bryan would be futile. | ||
e. | The principal professional occupation of defendant Blankfein is his employment with Goldman as its CEO, pursuant to which he has received and continues to receive substantial monetary compensation and other benefits. Thus, defendant Blankfein lacks independence from demonstrably interested directors, rendering him incapable of impartially considering a demand to commence and vigorously prosecute this action; |
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f. | The principal professional occupation of defendant Cohn is his employment with Goldman as its President and COO, pursuant to which he has received and continues to receive substantial monetary compensation and other benefits. Thus, defendant Cohn lacks independence from demonstrably interested directors, rendering him incapable of impartially considering a demand to commence and vigorously prosecute this action; and | ||
g. | The Board has failed to investigate or remedy the massive illicit insider sales by the Insider Selling Defendants described herein. Under such circumstances Delaware law does not require a stockholder to make a pre-suit demand on a board of directors. Thus, demand is excused. |
COUNT I
AGAINST ALL DEFENDANTS FOR BREACH OF FIDUCIARY DUTY FOR
DISSEMINATING FALSE AND MISLEADING INFORMATION
AGAINST ALL DEFENDANTS FOR BREACH OF FIDUCIARY DUTY FOR
DISSEMINATING FALSE AND MISLEADING INFORMATION
161. Plaintiff incorporates by reference and realleges each and every allegation set forth
above, as though fully set forth herein.
162. As alleged in detail herein, each of the Defendants (and particularly the Audit
Committee Defendants) had a duty to ensure that Goldman disseminated accurate, truthful and
complete information to its shareholders.
163. Defendants violated their fiduciary duties of care, loyalty, and good faith by causing
or allowing the Company to disseminate to Goldman shareholders materially misleading and
inaccurate information through, inter alia, SEC filings and other public statements and
disclosures as detailed herein. These actions could not have been a good faith exercise of prudent
business judgment.
164. As a direct and proximate result of Defendants foregoing breaches of fiduciary
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duties, the Company has suffered significant damages, as alleged herein.
COUNT II
AGAINST ALL DEFENDANTS FOR BREACH OF FIDUCIARY
DUTIES FOR FAILING TO MAINTAIN INTERNAL CONTROLS
AGAINST ALL DEFENDANTS FOR BREACH OF FIDUCIARY
DUTIES FOR FAILING TO MAINTAIN INTERNAL CONTROLS
165. Plaintiff incorporates by reference all preceding and subsequent paragraphs as if fully
set forth herein.
166. As alleged herein, each of the Defendants had a fiduciary duty to, among other things,
exercise good faith to ensure that the Companys financial statements were prepared in accordance
with GAAP, and, when put on notice of problems with the Companys business practices and
operations, exercise good faith in taking appropriate action to correct the misconduct and prevent
its recurrence.
167. Defendants willfully ignored the obvious and pervasive problems with Goldmans internal
controls practices and procedures and failed to make a good faith effort to correct the problems
or prevent their recurrence.
168. As a direct and proximate result of the Defendants foregoing breaches of
fiduciary duties, the Company has sustained damages.
COUNT III
AGAINST ALL DEFENDANTS FOR BREACH OF FIDUCIARY DUTIES FOR
FAILING TO PROPERLY OVERSEE AND MANAGE THE COMPANY
AGAINST ALL DEFENDANTS FOR BREACH OF FIDUCIARY DUTIES FOR
FAILING TO PROPERLY OVERSEE AND MANAGE THE COMPANY
169. Plaintiff incorporates by reference and realleges each and every allegation contained
above, as though fully set forth herein.
170. Defendants owed and owe Goldman fiduciary obligations. By reason of their fiduciary
relationships, Defendants specifically owed and owe Goldman the highest obligation of good faith,
fair dealing, loyalty and due care.
171. Defendants, and each of them, violated and breached their fiduciary duties of care,
loyalty, reasonable inquiry, oversight, good faith and supervision.
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172. As a direct and proximate result of Defendants failure to perform their fiduciary
obligations, Goldman has sustained significant damages, not only monetarily, but also to its
corporate image and goodwill.
173. As a result of the misconduct alleged herein, Defendants are liable to the Company.
174. Plaintiff, on behalf of Goldman, has no adequate remedy at law.
COUNT IV
AGAINST ALL DEFENDANTS FOR UNJUST ENRICHMENT
AGAINST ALL DEFENDANTS FOR UNJUST ENRICHMENT
175. Plaintiff incorporates by reference and realleges each and every allegation set forth
above, as though fully set forth herein.
176. By their wrongful acts and omissions, the Defendants were unjustly enriched at the
expense of and to the detriment of Goldman.
177. Plaintiff, as a shareholder and representative of Goldman, seeks restitution from these
Defendants, and each of them, and seeks an order of this Court disgorging all profits, benefits
and other compensation obtained by these Defendants, and each of them, from their wrongful conduct
and fiduciary breaches.
COUNT V
AGAINST ALL DEFENDANTS FOR ABUSE OF CONTROL
AGAINST ALL DEFENDANTS FOR ABUSE OF CONTROL
178. Plaintiff incorporates by reference and realleges each and every allegation contained
above, as though fully set forth herein.
179. Defendants misconduct alleged herein constituted an abuse of their ability to control
and influence Goldman, for which they are legally responsible. In particular, Defendants abused
their positions of authority by causing or allowing Goldman to misrepresent material facts
regarding its financial position and business prospects.
180. As a direct and proximate result of Defendants abuse of control, Goldman has
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sustained significant damages.
181. As a result of the misconduct alleged herein, Defendants are liable to the Company.
182. Plaintiff, on behalf of Goldman, has no adequate remedy at law.
COUNT VI
AGAINST ALL DEFENDANTS FOR GROSS MISMANAGEMENT
AGAINST ALL DEFENDANTS FOR GROSS MISMANAGEMENT
183. Plaintiff incorporates by reference and realleges each and every allegation set forth
above, as though fully set forth herein.
184. Defendants had a duty to Goldman and its shareholders to prudently supervise, manage and
control the operations, business and internal financial accounting and disclosure controls of
Goldman.
185. Defendants, by their actions and by engaging in the wrongdoing described herein,
abandoned and abdicated their responsibilities and duties with regard to prudently managing the
businesses of Goldman in a manner consistent with the duties imposed upon them by law. By
committing the misconduct alleged herein, Defendants breached their duties of due care, diligence
and candor in the management and administration of Goldmans affairs and in the use and
preservation of Goldmans assets.
186. During the course of the discharge of their duties, Defendants knew or recklessly disregarded
the unreasonable risks and losses associated with their misconduct, yet Defendants caused
Goldman to engage in the scheme complained of herein which they knew had an unreasonable
risk of damage to Goldman, thus breaching their duties to the Company. As a result,
Defendants grossly mismanaged Goldman.
COUNT VII
AGAINST ALL DEFENDANTS FOR WASTE OF CORPORATE ASSETS
AGAINST ALL DEFENDANTS FOR WASTE OF CORPORATE ASSETS
187. Plaintiff incorporates by reference and realleges each and every allegation
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contained above, as though fully set forth herein.
188. As a result of the misconduct described above, and by failing to properly consider the
interests of the Company and its public shareholders, Defendants have caused Goldman to incur (and
Goldman may continue to incur) significant legal liability and/or legal costs to defend itself as a
result of Defendants unlawful actions.
189. As a result of this waste of corporate assets, Defendants are liable to the Company.
190. Plaintiff, on behalf of Goldman, has no adequate remedy at law.
COUNT VIII
AGAINST THE INSIDER SELLING DEFENDANTS FOR BREACH OF FIDUCIARY
DUTIES
AGAINST THE INSIDER SELLING DEFENDANTS FOR BREACH OF FIDUCIARY
DUTIES
191. Plaintiff incorporates by reference and realleges each and every allegation set forth
above, as though fully set forth herein.
192. At the time of the stock sales set forth herein, the Insider Selling Defendants were in
possession of material, non-public, adverse information described above, and sold Goldman common
stock on the basis of such information.
193. The information described above (the July 2009 Wells Notice served on the Company by the
SEC) was non-public information which the Insider Selling Defendants used for their own benefit
when they sold Goldman common stock.
194. Since the use of material, adverse, non-public information about Goldman for their own
pecuniary gain constitutes a breach of their fiduciary duties, the Company is entitled to
the imposition of a constructive trust on any profits the Insider Selling Defendants
obtained thereby.
COUNT IX
AGAINST THE DIRECTOR DEFENDANTS FOR BREACH OF FIDUCIARY DUTIES
AGAINST THE DIRECTOR DEFENDANTS FOR BREACH OF FIDUCIARY DUTIES
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FOR FAILING TO INVESTIGATE AND/OR REMEDY IMPROPER INSIDER SALES
195. Plaintiff incorporates by reference and realleges each and every allegation set forth
above, as though fully set forth herein.
196. Each Director Defendant was and is required to act with the utmost loyalty and good
faith to the Company. Each Director Defendants has violated these core duties by failing to
investigate and/or remedy the improper insider sales made by the Insider Selling Defendants while
they, but not the public, knew of the July 2009 Wells Notice served on the Company by the SEC.
197. As a direct and proximate result of the Director Defendants foregoing breaches of
fiduciary duties, the Company has suffered significant damages, as alleged herein.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff demands judgment as follows:
A. Against all Defendants and in favor of the Company for the amount of damages sustained by
the Company as a result of Defendants breaches of fiduciary duties;
B. Directing Goldman to take all necessary actions to reform and improve its corporate
governance and internal procedures to comply with applicable laws and to protect the Company and
its shareholders from a repeat of the damaging events described herein, including, but not limited
to, putting forward for shareholder vote resolutions for amendments to the Companys By-Laws or
Articles of Incorporation and taking such other action as may be necessary to place before
shareholders for a vote a proposal to strengthen the Boards supervision of operations and develop
and implement procedures for greater shareholder input into the policies and guidelines of the
Board
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C. Directing the Board to immediately disclose the existence of any as-yet undisclosed
Wells Notices which have been issued to the Company or to any of the Defendants by the SEC;
D. Awarding to Goldman restitution from Defendants, and each of them, and ordering
disgorgement of all profits, benefits and other compensation obtained by the Defendants;
E. Awarding to Plaintiff the costs and disbursements of the action, including reasonable
attorneys fees, accountants and experts fees, costs, and expenses; and
F. Granting such other and further relief as the Court deems just and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
Dated: April 26, 2010 | HARWOOD FEFFER LLP |
|||
/s/ ROBERT I. HARWOOD | ||||
ROBERT I. HARWOOD | ||||
488 Madison Avenue New York, NY 10022 Telephone (212) 935-7400 Facsimile: (212) 753-3630 |
||||
THE WEISER LAW FIRM, P.C.
ROBERT B. WEISER
BRETT D. STECKER
JEFFREY J. CIARLANTO
121 N. Wayne Avenue, Suite 100
Wayne, PA 19087
Telephone: (610)225-2677
Facsimile: (610) 225-2678
ROBERT B. WEISER
BRETT D. STECKER
JEFFREY J. CIARLANTO
121 N. Wayne Avenue, Suite 100
Wayne, PA 19087
Telephone: (610)225-2677
Facsimile: (610) 225-2678
THE WEISER LAW FIRM, P.C.
KATHLEEN A. HERKENHOFF
12707 High Bluff Drive, Suite 200
San Diego, CA 92130
Telephone: (858) 794-1441
Facsimile: (858) 794-1450
KATHLEEN A. HERKENHOFF
12707 High Bluff Drive, Suite 200
San Diego, CA 92130
Telephone: (858) 794-1441
Facsimile: (858) 794-1450
-76-
LAW OFFICE OF ALFRED G. YATES, JR., P.C.
ALFRED G. YATES, JR.
GERALD L. RUTLEDGE
519 Allegheny Building
429 Forbes Avenue
Pittsburgh, PA 15219
Telephone: (412) 391-5164
Facsimile: (412) 471-1033
ALFRED G. YATES, JR.
GERALD L. RUTLEDGE
519 Allegheny Building
429 Forbes Avenue
Pittsburgh, PA 15219
Telephone: (412) 391-5164
Facsimile: (412) 471-1033
Counsel for Plaintiff
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GOLDMAN SACHS, INC. VERIFICATION
I, Margaret C. Richardson, hereby verity that I am familiar with the allegations in the
Complaint, and that I have authorized the filing of the Complaint, and that the foregoing is true
and correct to the best of my knowledge, information and belief.
DATE: 4-26-10 | /s/ MARGARET C. RICHARDSON | |||
MARGARET C. RICHARDSON | ||||