MANHATTAN (CN) – Goldman Sachs cannot wiggle out of class action securities fraud claims by arguing that public statements that it valued “honesty,” “integrity” and “fair dealing” were “puffery,” not promises, a federal judge ruled.
“Goldman’s arguments in this respect are Orwellian,” U.S. District Judge Paul Crotty wrote in a footnote to his 27-page order. “Words such as ‘honesty,’ ‘integrity,’ and ‘fair dealing’ apparently do not mean what they say; they do not set standards; they are mere shibboleths. If Goldman’s claim of ‘honesty’ and ‘integrity’ are simply puffery, the world of finance may be in more trouble than we recognize.”
On April 26, 2010, shareholder Ilene Richman filed a class action against Goldman Sachs, in the wake of the bank’s infamous Abacus investment.
Weeks earlier, the Securities and Exchange Commission claimed Goldman Sachs created Abacus 2007-AC1 in February 2007 at the request of John Paulson, a hedge fund manager who earned $3.7 billion by correctly betting that the housing bubble was about to burst.
The bank paid $550 million on July 15, 2010 to settle the SEC’s suit without confirming or denying the allegations.
At the time, the SEC called it the largest penalty a Wall Street firm ever paid, with $300 million going to the Treasury Department and the rest going to investor restitution.
But the settlement did not resolve Richman’s class action, which claimed that statements the bank made about the Abacus and three other transactions materially misled shareholders.
Some of those allegedly misleading statements include a 10-K form stating, “”We have extensive procedures and controls that are designed to . . . address conflicts of interest”; and annual reports stating, “Integrity and honesty are at the heart of our business” and “We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us.”
Citing the 2nd Circuit decision in the case of Rombach v. Chang, Goldman Sachs wrote in a motion to dismiss, “Expressions of puffery and corporate optimism do not give rise to securities violations.”
Judge Crotty rejected that argument.
“Goldman must not be allowed to pass off its repeated assertions that it complies with the letter and spirit of the law, values its reputation, and is able to address ‘potential’ conflicts of interest as mere puffery or statements of opinion,” he wrote. “Assuming the truth of plaintiffs’ allegations, they involve ‘misrepresentations of existing facts.'”
Crotty added that Goldman Sachs’ refusal to admit guilt about the Abacus deal in SEC settlement rang hollow in light of the company’s subsequent statements.
“Goldman’s assertion that it ‘neither admitted, nor denied’ that its Abacus disclosures were fraudulent is eviscerated by its concession that ‘it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors,'” the order states. “Goldman paid a $550 Million settlement to the SEC-the largest SEC penalty in history-because of the ‘mistake’ it acknowledged.”
Crotty rejected that it was a “mistake” at all.
“With respect to Abacus, Goldman certainly knew that Paulson played an active role in the asset selection process,” he wrote. “How else could Goldman admit that it was a ‘mistake’ not to have disclosed such information?”
Executives Lloyd Blankfein, David Vinier and Gary Cohn likely also knew, he added.
“These allegations, taken as true, show that each individual defendant actively monitored the status of Goldman’s subprime assets and subprime deals during the relevant time, and that each knew that Goldman was trying to purge these assets from its books and stay on the short side,” the order states. “These allegations create a strong inference that the Individual Defendants knew that Goldman was making material misstatements in the Abacus, Hudson, Anderson, and Timberwolf I CDOs, when it sold poor quality assets to investors without disclosing its or Paulson’s substantial short positions.”
The bank and its executives were not obligated, however, to disclose the Wells notice informing them that the SEC would bring an enforcement action against them, Crotty decided, in the bank’s only favorable ruling in its motion to dismiss.The press department for Goldman Sachs declined comment on the decision.