Goldman Directors Dodge Another Bullet

     MANHATTAN (CN) – Days after federal prosecutors announced that Goldman Sachs would not be criminally prosecuted, a federal judge tossed a lawsuit that sought the firing of the bank’s directors.
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     The two developments ensure that the bank’s executive will receive little blowback for Goldman Sachs’ conduct in the financial crisis.
     Sen. Carl Levin, D-Mich, co-authored a 639-page report that hammered Goldman Sachs for helping spark the collapse by betting against residential mortgage-backed securities that the bank urged customers to buy.
     On Thursday night, the Department of Justice reportedly released a statement announcing that there was no “viable basis to bring a criminal prosecution” against Goldman Sachs.
     Responding to the announcement, Levin said, “Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs’ actions were deceptive and immoral.”
     Now, each director will keep his or her job thanks to a ruling released days later, which tossed a shareholder action by the director of an Alabama-based retirement fund.
     Michael Brautigam, on behalf of the Retirement Relief System of the City of Birmingham, Alabama, sued 15 high-ranking Goldman Sachs in Manhattan Federal Court on July 1, 2011.
     According to the lawsuit, Goldman Sachs’ subprime mortgage business had billions of dollars in short positions as the meltdown began, and in return for $10 billion in federal funding, the officers and directors agreed to modify terms of residential mortgages to strengthen the health of the U.S. housing market.
     Despite these promises, the settlement of a state court claim in Massachusetts, and scores of mortgage-related disclosures to the SEC, the defendants have failed to take any meaningful action to protect the company and set its mortgage-related business right, Brautigam said.
     This failure to act “exposed Goldman to having to participate in a potential settlement with attorneys general of several states in which the company may have to pay a share of billions of dollars related to alleged improper residential mortgage loan servicing practices,” according to the 51-page complaint.
     The lawsuit sought to unseat Goldman CEO Lloyd Blankfein; directors Gary Cohn, John Bryan, Claes Dahlback, Stephen Friedman, William George, James Johnson, Lois Juliber, Lakshmi Mittal, James Schiro, Debra Spar, Ruth Simmons, and Rajat Gupta; and Chief Financial Officer David Viniar.
     The suit also named Larry Litton, Jr., the head of a former Goldman subsidiary that the bank sold amid allegations that it was involved in the “robo-signing” scandal.
     With the exception of Gupta, who faces a lengthy jail sentence for unrelated insider trading crimes, each of the other defendants dodged the relief Brautigam sought.
     U.S. District Judge William Pauley III found that an email between Goldman’s CEO, CFO and COO acknowledging the shorting mortgage-backed securities did not necessarily amount to an admission that the securities were troubled.
     “Plaintiffs also rely on a November 2007 email from Blankfein to Cohn and Viniar, acknowledging Goldman’s practice of ‘shorting’ the RMBS [residential mortgage-backed securities] it sold,” Pauley wrote. “Plaintiffs theorize that ‘shorting’ proves that the Board Defendants knew that Goldman included troubled loans in the RMBS. Plaintiffs further allege that in 2007, Defendants Blankfein, Bryan, Cohn, Dalback, Friedman, George, Johnson, and Juliber discussed the mortgage crisis and tactical steps Goldman was taking to deal with it, including ‘shorting.’ But again, Plaintiffs do not plead any specific ‘red flags’ that would have alerted these defendants to the fact that Goldman included troubled loans in the RMBS. And courts have generally required a much stronger showing to find that directors face a substantial likelihood of liability.”
     Lawyers for Brautigam were not immediately available to respond to the decision.

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