More Delay as Shareholders Seek Justice for Goldman Sachs’ Crisis-Era Fraud

On Monday, June 21, the U.S. Supreme Court issued its decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System.  A group of Goldman shareholders, including pension funds, are seeking to hold the bank accountable for its fraud through a class action. What’s at stake, in this case, is whether Goldman Sachs and other corporations can lie to investors and avoid accountability to their victims in a class action. 

• Goldman Sachs affirmatively stated to investors that it had “extensive procedures and controls in place” to manage conflicts of interest and reassured investors that their clients “always come first.”  Those statements were false and misleading as clearly revealed by Goldman’s egregious actions perpetrating one of the most shameless frauds in the history of the 2008 financial crisis.  It packaged complex mortgage-backed securities designed to fail and bet against them, even as it touted them to investors as a good deal.  But the first challenge for the shareholder plaintiffs is to persuade the court to certify the case as a class action.
• The Court decided on two issues.  First, it confirmed that the generic nature of misrepresentation is something a trial court should consider as it decides whether a misrepresentation about a company could have affected the market price of the company’s stock.  Second, it correctly held that the burden of persuasion falls on the defendant (Goldman in this case) when it comes to price impact—it is their duty to show, by a preponderance of the evidence if possible, that the misrepresentations did not have a price impact.  However, the Court also decided to send the case back to the Second Circuit, since it wasn’t convinced the lower court took the supposedly generic nature of Goldman’s misrepresentations properly into account when it allowed the case to go forward.
• As we argued in our Amicus brief, given Goldman’s history of mishandling its conflicts of interest even prior to the financial crisis, the market would certainly have been influenced and comforted by Goldman’s false assurances that it carefully controlled such conflicts.  After all, that presumably was Goldman’s intent in making the statement to investors in the first place.  Thus, the issue of price impact should be resolved in the shareholders’ favor.  The Second Circuit now has a chance to put this issue to rest and give the shareholders their day in court, where we will again argue for that outcome. If the Second Circuit gets it wrong, then Goldman gets a free pass for its fraud.

Better Markets continues to track a number of important cases involving financial regulation:

• A lawsuit (Thomas v. SEC) challenging the SEC’s flawed whistleblower rule changes adopted by the Trump administration, which threaten to reduce incentives for whistleblowers to come forward with critical evidence of securities law violations. 
  • Why it matters? The Dodd-Frank Act required the SEC to establish a strong whistleblower program to encourage people, particularly insiders at financial firms, to come forward with often difficult to obtain evidence of illegal conduct. The program entitles whistleblowers to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by certain other regulatory and law enforcement authorities.
  • This program has proven to be an enormous success, enabling the SEC to recover billions of dollars in penalties and hundreds of millions of dollars in disgorgement for the benefit of injured investors. In fact, we called it “A $2 Billion Success Story” in a White Paper. Unfortunately, last year, the SEC weakened the program by issuing a rule that gave the agency broad discretion to limit the size of awards. It also created new hurdles for whistleblowers seeking awards where their evidence helped another agency bring a successful enforcement action, in violation of the law.
  • That’s why we applauded a whistleblower advocate’s lawsuit to overturn the deeply flawed and legally baseless rule. 
• A lawsuit (The Doris Behr Irrevocable Trust v. Johnson & Johnson) attempting to force public company shareholders into mandatory arbitration, a biased, secretive, and anti-consumer forum. 
  • Why it matters? Mandatory or forced arbitration takes away the rights of consumers and investors to seek relief in open court before unbiased judges when they are ripped off by banks and corporations. Mandatory arbitration takes all that away and forces defrauded investors and other victims into secret, unfair, and biased arbitrations. Those proceedings are generally run by an industry self-regulatory organization (SRO) which, no surprise, is often biased and consistently favors the industry. Investors and consumers are typically forced to take their complaints to those forced arbitrations, but they rarely obtain meaningful recovery. 
  • A court will decide if a public company can be forced to impose mandatory arbitration not just on its customers but also on any shareholders with claims against the company for fraud, mismanagement, or other breaches of duty. If the court gets this wrong and allows this dramatic—and dramatically bad—legal development, then the toxic effects of mandatory arbitration will be further broadened, incentivizing lawbreaking by limiting the legal rights of investors to stop it.
  • Given that shareholders are the owners of public companies and they rely on legal actions as one important way to protect their investments and police management, such a decision could have a significant and adverse impact on capital formation and allocation. 
• A lawsuit (National Association for Latino Community Builders v. CFPB) challenging the CFPB’s harmful rule that rescinded the underwriting requirements for payday lenders, a commonsense provision that required those lenders to determine whether borrowers could afford to repay their short-term loans. That’s right: the rule merely required lenders to determine at the time a loan was issued that the borrower could afford to repay it. It’s a basic, commonsense, and relatively simple process—unless, of course, the predatory financial firm doesn’t want to make loans that are repaid but instead seeks the legal right to trap desperate borrowers in a never-ending cycle of debt with more and bigger fees and higher interest rates, what we call a “debtor’s prison without walls.” Dennis wrote an op-ed on this issue for The Hill.
  • Why it matters? Under the Obama administration, after years of substantive and robust analysis, the CFPB crafted important protections for consumers who need short-term or “payday” loans. Among them was the requirement that payday lenders determine a borrower’s ability to repay a loan before extending credit. The purpose was to prevent those lenders from deliberately trapping desperate borrowers in endless cycles of unaffordable debt that saddle them with huge interest payments and fees.
  • Under the Trump administration, the CFPB nullified those underwriting requirements in a deplorable example of baseless rulemaking plainly designed to accommodate the payday lending industry and in response to relentless industry lobbying (and, reportedly, campaign contributions). Now a court will have the opportunity to nullify the Trump rule and restore the underwriting requirements for the benefit of millions of vulnerable borrowers living on the economic edge.