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Here’s an interesting tidbit, or two, or three (or four) from the ‘Legal Proceedings’ part of Goldman Sachs’ filing to the Securities and Exchange Commission, published on Monday:
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…
Ahem. Are you sitting down?
Good. Let’s begin with the SEC’s Abacus complaint, and its consequences, emphasis FT Alphaville’s:
On April 16, 2010, the SEC brought an action (SEC Action) under the U.S. federal securities laws in the U.S. District Court for the Southern District of New York against GS&Co. and one of its employees in connection with a CDO offering made in early 2007 (2007 CDO Transaction), alleging that the defendants made materially false and misleading statements to investors and seeking, among other things, unspecified monetary penalties. Notices of investigation subsequently have been received by GS&Co. from FINRA and by GSI from the U.K. Financial Services Authority, and Group Inc. and certain of its affiliates have received requests for information from other regulators regarding CDO offerings, including the 2007 CDO Transaction, and related matters…
Next, Abacus-related shareholder anger:
Since April 22, 2010, a number of putative shareholder derivative actions have been filed in New York Supreme Court, New York County, and the United States District Court for the Southern District of New York against Group Inc., the Board and certain officers and employees of Group Inc. and its affiliates in connection with CDO offerings made between 2004 and 2007, including the 2007 CDO Transaction. These derivative complaints generally include allegations of breach of fiduciary duty, corporate waste, abuse of control, mismanagement, unjust enrichment, misappropriation of information and insider trading, and challenge the accuracy and adequacy of Group Inc.'s disclosure…
More Abacus-related shareholder anger:
Since April 23, 2010, the Board has received letters from shareholders demanding that the Board take action to address alleged misconduct by GS&Co., the Board and certain officers and employees of Group Inc. and its affiliates. The demands generally allege misconduct in connection with the 2007 CDO Transaction, the alleged failure by Group Inc. to adequately disclose the SEC investigation that led to the SEC Action, and Group Inc.'s 2009 compensation practices. The demands include a letter from a Group Inc. shareholder, which previously made a demand that the Board investigate and take action in connection with auction products matters, and has now expanded its demand to address the foregoing matters.
And yet more Abacus-related anger:
In addition, beginning April 26, 2010, a number of purported securities law class actions have been filed in the United States District Court for the Southern District of New York challenging the adequacy of Group Inc.'s public disclosure of, among other things, the firm's activities in the CDO market and the SEC investigation that led to the SEC Action. The purported class action complaints, which name as defendants Group Inc. and certain officers and employees of Group Inc. and its affiliates, generally allege violations of Sections 10(b) and 20(a) of the Exchange Act and seek unspecified damages.
Here’s a key bit to note, emphasis FT Alphaville’s:
We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions commenced, against us with respect to offerings of CDOs.
Nor can we improve upon Goldman’s own estimation of the legal risks facing it from the SEC case. As the filing continues, emphasis ours:
To the extent we are unable to obtain appropriate waivers from relevant regulators, resolution of the SEC Action, through a judgment or a settlement that includes an injunction, a cease-and-desist order or a finding of fraud, could result in collateral consequences to us that may materially adversely affect the manner in which we conduct our businesses, including, without limitation, an inability to act as a registered broker-dealer or provide certain advisory and other services to U.S. registered mutual funds. In addition, regulators could impose restrictions on the activities of our banking, commodities, investment advisory or other regulated businesses…
Nor is it simply the SEC.
Goldman also faces judicial and regulatory risks from other quarters, according to the filing. Starting with derivatives transactions with the Greek government:
Transactions with the Hellenic Republic (Greece). Group Inc. and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations in connection with the firm's transactions with the Hellenic Republic (Greece), including financing and swap transactions. Goldman Sachs is cooperating with the investigations and reviews.
Interesting one to reflect back upon, this.
Der Spiegel alleged in February that Goldman had helped Greece ‘mask’ its sovereign debt with cross currency swaps — a deal originally reported in Risk seven years ago.
The reports prompted a Federal Reserve investigation into currency swaps.
Other problems facing Goldman at the moment:
Sales and Trading Practices. Group Inc. and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations relating to the sales, trading and clearance of corporate and government securities and other financial products, including compliance with the SEC's short sale rule, algorithmic and quantitative trading, futures trading, trading of credit derivative instruments, commodities trading and the effectiveness of internal information barriers. Goldman Sachs is cooperating with the investigations and reviews.
Municipal Securities Matters. Group Inc. and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations relating to transactions involving municipal securities, including wall-cross procedures and conflict of interest disclosure with respect to state and municipal clients, the trading of municipal derivative instruments in connection with municipal offerings and the possible impact of credit default swap transactions on municipal issuers. Goldman Sachs is cooperating with the investigations and reviews…
And last, but not least, continued regulatory scrutiny into Goldman’s role during the AIG bailout:
Financial Crisis-Related Matters. Group Inc. and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations relating to the 2008 financial crisis, including the establishment and unwind of credit default swaps between Goldman Sachs and American International Group, Inc. (AIG) and other transactions with, and in the securities of, AIG, The Bear Stearns Companies Inc., Lehman Brothers Holdings Inc. and other firms. Goldman Sachs is cooperating with the investigations and reviews.
Indeed. This new, improved, transparent Goldman Sachs is quite fun, actually.
Sunlight is the best disinfectant, as they say.
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