In a significant development U.S. District Judge Paul Crotty in Manhattan ruled that Goldman Sachs Group Inc will have to again face a class action by shareholders who said they lost $13 billion since the bank hid conflicts of interest when creating risky subprime securities before the 2008 financial crisis.
Rejecting Goldman’s claim that its general statements about its business, including that of client interests “always come first” and “integrity and honesty are at the heart of our business,” U.S. District Judge Paul Crotty in Manhattan ruled that the statement was too generic to mislead investors and affect its stock price.
Shareholders have accused Goldman Sachs of concealing its packaging and selling of collateralized debt obligations it wanted to fail so favored clients like hedge fund billionaire John Paulson could secretly bet against them. They also claimed Goldman’s shares fell after the truth became public.
Goldman declined comment.
According to Darren Robbins, a lawyer for shareholders including the Arkansas Teacher Retirement System, they were ready to move the 11-year-old case to trial.
The lawsuit had reached the U.S. Supreme Court, and in June it ruled that lower courts could use expert testimony and “a good dose of common sense” in deciding whether generic statements affected stock prices.
Acting on that decision, Crotty said even Goldman’s more generic statements could reinforce misconceptions about its practices, and that Goldman offered no evidence its stock price would have “held fast” had it disclosed its conflicts.
Noting Goldman’s claim that dozens of blue-chip companies make similar statements, Crotty said he was “hard pressed” to understand why such statements would achieve “such ubiquity” if they had no effect on stock prices.
According to the judge, Goldman did not show it more likely than not that its alleged misstatements “had no price impact whatsoever.”
In 1988, the Supreme Court had ruled that investors could rely on a presumption that all public information about a company was reflected in its stock price.
In 2010, Goldman reached a $550 million settlement resolving U.S. Securities and Exchange Commission charges that it concealed Paulson’s role in creating the Abacus 2007-AC1 CDO, and that he made $1 billion betting against it.
The lawsuit is Goldman Sachs Group Inc Securities Litigation, U.S. District Court, Southern District of New York, No. 10-03461.