MANHATTAN (CN) – Goldman Sachs’ top dogs failed to take corrective action before and after the collapse of mortgage-backed securities touched off the global financial crisis, exposing the firm to billions of dollars in liabilities, shareholders say in a federal derivative complaint.
Michael Brautigam, a holder of Goldman Sachs common stock, says as a result of this “willful inaction,” the firm “has suffered, and will continue to suffer serious financial and reputation impacts from the inadequate servicing of troubled residential mortgage loans.”
Brautigam seeks the removal of 15 defendant officers and directors, including CEO Lloyd Blankfein.
Brautigam says defendants failed to implement and maintain adequate internal controls to manage the “foreseeably immense financial fallout from inadequate residential mortgage loan underwriting standards”.
This was despite extensive discussions of the situation and the firm’s tactical positioning in the approaching crisis as early as 2007 and continuing today, Brautigam says.
As the meltdown began, Brautigam says, Goldman Sachs’ subprime mortgage business had billions of dollars in short position, 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 says.
This failure to act has “now 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.
In addition to the removal of the officers and directors, Brautigam seeks a court order directing Goldman Sachs to take all necessary actions to reform and improve its corporate governance and internal procedures to avoid a repeat of the damaging events, including imposition of new procedures for evaluating residential mortgage loan modification requests and foreclosures.
Brautigam also seeks disgorgement of all profits, benefits and other compensation the defendants received from the company.
He is represented by Brian D. Brooks with Smith Foote.