No Fees for Investors Who Sued Goldman Sachs
(CN) - Investors who brought a suit against Goldman Sachs that allegedly prompted it to scuttle plans to pay excessive compensation to some employees in 2009, are not entitled to attorney's fees, a New York appeals court has ruled.
A group of investors filed three suits in December 2009 and January 2010, which were later consolidated, alleging that Goldman Sachs Group, Inc., would soon announce plans to allocation around half of net revenues for employee compensation in 2009, as it had the year before.
That would have "rewarded' executives for corporate performance that has absolutely nothing to do with the skill of the company's employees," the complaint alleged.
The company's performance that year had far more to do with "accounting trickery" and the government bailout of financial services firms in the wake of the 2008 financial meltdown, the suit asserted.
Just six weeks after the first of the suits was filed, Goldman announced just 35.8 percent of net revenue would be used to provide compensation and benefits, significantly less than the year before; that prompted the plaintiffs to announce that they had achieved their objectives and therefore would move to voluntarily dismiss the suit.
At that time, they also filed an application seeking an award of attorney's fees and litigation costs under Business Corporation Law section that allows for fee awards if derivative actions on behalf of shareholders are successful.
In their motion for fees, the plaintiffs asserted that their lawsuit was responsible for the decision by the Goldman Sachs board to approve $5 billion less in employee compensation in 2009 than it otherwise would have.
Without addressing the merits of that claim, the New York Appellate Division's First Department unanimously ruled the plaintiffs are not entitled to fees and costs because they failed to make a pre-suit demand seeking a reduction in compensation or demonstrate that any such demand would have been futile, as required by the law.
Writing for the court, Justice David Friedman said, "[I]f their main concern was saving money for GSG's shareholders by reducing excessive employee compensation, they might well have accomplished the same result (assuming for the sake of argument that their actions had any influence on the board) by presenting the board with a formal demand, as the law contemplates.
"If plaintiffs had made such a demand, and the board had set compensation at the level it ultimately did (which plaintiffs deem satisfactory), GSG shareholders would have benefitted from the corporation's reduced compensation expense as well as from avoiding having to pay plaintiffs' attorneys' fees (and avoiding having to oppose or defend their fee application)," he continued.
The plaintiffs argued that if the litigation had continued, they could have amended their complaint to make "sufficiently particularized allegations" that any such demands of the board would have been futile, meeting the technical requirements of the Business Corporation Law. "If plaintiffs believed that they had a basis for such an amendment, they should have submitted that evidence to Supreme Court in support of their fee application," Friedman said.
Richard T. Andrias, Rolando T. Acosta, Helen E. Freedman and Darcel D. Clark joined in the decision, which affirmed an order issued by New York County Supreme Court Justice Bernard J. Fried.